Beyond Correlation: Measuring Interdependence
Through Complementarities
Bruno Strulovici∗

Margaret Meyer

August 2, 2015

Abstract
Given two sets of random variables, how can one determine whether the former variables are
more interdependent than the latter? This question is of major importance to economists, forexample, in comparing how various policies affect systemic risk or income inequality. Moreover,correlation is ill-suited to this task as it is typically not justified by any economic objective.
Economists’ interest in interdependence often stems from complementarities (or substitutabilities) in the environment they analyze. This paper studies interdependence using supermodular objective functions: these functions treat their variables as complements, and their
expectation increases as the realizations of the variables become more aligned.
The supermodular ordering has a linear structure, which we exploit to obtain tractable characterizations and methods for comparing multivariate distributions, and extend when objectivefunctions are also monotonic or symmetric. We also provide sufficient conditions for comparing
random variables generated by common and idiosyncratic shocks or by heterogeneous lotteries,
and illustrate our methods with several applications.

Keywords: Interdependence, Supermodularity, Correlation, Copula, Mixture, Majorization, Tournament. JEL Codes: D63, D81, G11, G22∗

We are grateful for comments from David Cox, Ian Jewitt, Paul Klemperer, Mikhail Safronov, and seminar

participants at Cambridge, Université de Montréal, Oslo, Oxford Economics, Oxford Statistics, QMUL, Stanford(conference in honor of Paul Milgrom), Warwick, Wisconsin-Madison, Yale, the RUD Conference, the Transatlantic
Theory Workshop, and ESSET Gerzensee. This project was first presented at the RUD (2008) conference in Oxford
under the title “Increasing Interdependence of Multivariate Distributions”, and a first draft was circulated in February 2010, entitled “The Supermodular Stochastic Ordering.” Strulovici gratefully acknowledges financial support
from the NSF (Grant No. 1151410) and the Alfred P. Sloan Foundation. Meyer: Nuffield College and Dept. of Economics, Oxford University, Oxford OX1 1NF, UK, and CEPR, margaret.meyer@nuffield.ox.ac.uk; Strulovici: Dept. of
Economics, Northwestern University, 2001 Sheridan Road, Evanston, IL 60208, USA, b-strulovici@northwestern.edu.

11Introduction

The interdependence of random variables is of central interest to economists: it determines themacroeconomic consequences of firm-level shocks, the solvency of insurance companies protecting
large numbers of households, and the price of financial derivatives, like CDOs, whose payoffs dependon the return of many assets. Interdependence also affects welfare measures based on multiple
indicators like health, education and income, and the assessment of inequality in populations subject
to individual income risk. Furthermore, we show that comparisons of the quality of noisy matchingprocedures and of preference alignment among members of a search committee can also be framed
as comparisons of the interdependence of random variables.
Despite its prevalence as a statistical measure, correlation is inadequate to capture interdependence in economic settings, outside of Gaussian distributions or quadratic objective functions, justas variance is an inadequate measure of risk outside of similarly restrictive settings. Moreover,correlation-based rankings can be reversed depending on how data is aggregated, as Section 2 illustrates. At the opposite extreme, rankings of interdependence based on affiliation and association
are too demanding and often impracticable, as explained in Genest and Verret (2002) and in ourearlier work (Meyer and Strulovici (2012)). Copulas do not resolve the problem, either: while they
extract information about the interdependence of random variables, one still must choose a method
for comparing them.
This paper studies an ordering of interdependence based on supermodular objective functions.
These functions are commonly used to capture complementarity, a concept closely related to interdependence.1 In fact, economists’ interest in interdependence often stems from the presence ofcomplementarities in the problems they analyze. Supermodular objective functions are pervasive ineconomic analysis, from production functions in manufacturing systems and in matching contexts
to deprivation and welfare functions in the assessment of inequality. As we will illustrate, thesefunctions are also used to measure aggregate losses in finance and actuarial science and to estimateparameters in econometrics (such as OLS).
The link between interdependence and supermodularity is easily seen for the case of two variables. A function w is supermodular if w(x0 , y 0 ) + w(x, y) ≥ w(x, y 0 ) + w(x0 , y) whenever x0 > x
and y 0 > y. Hence, for a supermodular function, the effect of increasing two arguments together exceeds the sum of the effects of increasing each argument separately: w(x0 , y 0 ) − w(x, y) ≥1

See, e.g., Milgrom and Roberts (1990, 1995) in the context of manufacturing. In a recent application, Dziewulski

and Quah (2014) develop a test for the supermodularity of production functions. Their analysis builds on two
characterizations of “greater interdependence” from the present paper.

2(w(x0 , y) − w(x, y)) + (w(x, y 0 ) − w(x, y)). If w is supermodular, its expectation E[w(X, Y )] increases as X and Y become more interdependent in the following sense: the probability that bothvariables are high or both low is increased while the probability of one being high and the otherlow is decreased so as to keep the marginal distributions of X and Y unchanged.
Given two multivariate distributions with the same number of variables and finite support,
we will say that one distribution dominates another according to the supermodular ordering if
the expectation of all supermodular functions is higher under the former distribution than under
the latter. The central question of this paper is the following: given two distributions, how can
one test whether they are ranked according to this ordering? We develop several methods foraddressing this question, and we also provide sufficient conditions in two environments, variables
generated by common and idiosyncratic shocks and variables generated by heterogeneous lotteries,
for distributions to be ranked according to the ordering.
The supermodular ordering has a special linear structure which makes the analysis tractable.
In particular, Theorem 1 shows that a distribution is supermodularly dominated by another if
and only if one can go from the former to the latter by a sequence of two-dimensional elementarytransformations that increase the probability of homogeneous outcomes and reduce the probabilityof heterogeneous ones for the two corresponding variables, with each transformation affecting theprobabilities of only four adjacent points (a “square”) in the support of the distributions. This result
holds regardless of the number of dimensions of the original distributions. Moreover, this characterization is minimal: any proper subset of these elementary transformations fails to characterize
the supermodular ordering (Proposition 2). This property is important for numerical applications,as will be explained below.
The linear structure is also helpful for comparing the interdependence of empirical distributions.
Given two distributions with the same support, we provide an algorithm to test for the existenceof a sequence of elementary transformations taking one distribution to the other. Theorem 1
implies that supermodular dominance holds if and only if such a sequence exists. The algorithm
is formulated as a linear program similar to the ones used to find a solution to Afriat inequalities
and, in operations research, to the auxiliary linear programs used to check the feasibility of a given
linear program.
To compare many pairs of distributions instead of just one, the previous method is inadequate:
it would require solving one linear program for each pair. Fortunately, the supermodular orderingover any given support can more simply be characterized by a list of inequalities, using the double
description method invented by Motzkin et al. (1953). It then suffices to test, for any pair of3

distributions, whether the difference between these distributions (seen as vectors in an appropriate
space) satisfies all these inequalities. The double description method has been turned into a concretealgorithm (Avis and Fukuda (1982)) and is now available in standard computer languages including
C and Matlab. Appendix G provides the code of our algorithm and its numerical output for an
example with four binary random variables.
In applied work, data is aggregated into brackets which are to a large extent arbitrary. For
example, income may be described by brackets of 1000 dollars and life expectancy by brackets of
5 years. Theorem 1 implies that the supermodular ordering, unlike correlation, is robust to anycoarsening of the support and to any monotonic transformation of coordinates. For example, if a
joint distribution of income and life expectancy supermodularly dominates another when income iscompiled in brackets of 1000 dollars and life expectancy in brackets of 5 years, then supermodular
dominance continues to hold if brackets of 5,000 dollars and 10 years are used. It also holds if thecoarsening is uneven, for example if income brackets become wider near the top of the distribution.2
In applications such as welfare economics or production, objective functions are not only supermodular but also increasing in their arguments. To characterize the increasing supermodular
ordering, we show in Theorem 2 that the comparison of two distributions can be decomposed into
two steps: First, compare marginals according to first-order stochastic dominance. Then, compare
the joint distributions, normalized to ensure identical marginals, according to the supermodular
ordering.
When objective functions are symmetric – welfare economics is again a good example, withsymmetry capturing a form of anonymity across citizens – we show that this adds no complication
to the analysis: two distributions are ranked according to the symmetric supermodular ordering if
and only if the symmetrized versions of the distributions are ranked according to the supermodular
ordering.
A major source of interdependence, for economists, is the presence of common shocks. Mixturesof conditionally independent random variables (“mixture distributions”) are widely used to study
environments with both common and idiosyncratic shocks. In finance and insurance contexts,
mixture distributions are used to model positively dependent risks in a portfolio (Cousin andLaurent (2008)). In macroeconomics, the relative importance of aggregate vs. sectoral shocks
affects variation and covariation of output levels (Foerster et al. (2011)). Intuitively, the more
2

Uneven coarsenings of data are common and clearly relevant: since the exact thousand-dollar value of an income

above a million dollars, say, is unimportant, violations of interdependence rankings based on such detail seem equallyunimportant.

4

“important” the common shock in a mixture distribution relative to idiosyncratic shocks, the more“interdependent” the random variables should be. We study two questions: First, how can “greater
relative importance” of the common shock be formalized? Second, how can greater interdependence
be assessed? Our Theorem 3 answers both questions. We use the supermodular ordering to compareinterdependence, and we present easily checkable sufficient conditions on the structure of mixture
distributions for two such distributions to be comparable according to the supermodular ordering.
Our sufficient conditions provide a novel non-parametric ordering of the relative importance ofcommon vs. idiosyncratic shocks for mixture distributions.
Surprisingly, the argument used to compare mixture distributions can also be used in a completely different analytical environment, to compare distributions generated by lotteries, and yields
similar sufficient conditions. We consider the class of n-dimensional random vectors representing n
independent lotteries and focus on the case where the objective function defined on the outcomesof these lotteries is symmetric, as with an ex post welfare function. Theorem 4 provides sufficientconditions for symmetric supermodular dominance for random vectors within this class. These
conditions capture the idea that one set of lotteries is less heterogeneous than another, holding
fixed the average of the lotteries.
Several papers have studied the supermodular ordering before. For the special case of bivariate
distributions, Levy and Paroush (1974), Epstein and Tanny (1980), and Tchen (1980) have shownthat the supermodular ordering is equivalent to the combination of upper- and lower-“orthant”
dominance, and the latter two papers characterized the ordering in terms of a broad set of elementary transformations.3 (Our minimal set of elementary transformations is a strict subset.) With
three or more dimensions, the supermodular ordering has been shown to be strictly stronger thanthe combination of upper- and lower-orthant dominance (Joe (1990), Müller and Scarsini (2000),
and Meyer and Strulovici (2012)). Rüschendorf (1980, 1983, 2004) considers some other notionsof interdependence which also reduce to the supermodular ordering in the bivariate case. Promislow and Young (2005) study the cone of supermodular functions on lattices but do not provide
any characterization like ours. Giovagnoli and Wynn (2008) mention (without proof) a characterization result based on transformations involving more than two dimensions and non-adjacentpoints. In work subsequent to ours, and acknowledged as such, Müller (2013) contains a similar
characterization.4
3

We say that a random vector (Y1 , . . . , Yn ) dominates (X1 , . . . , Xn ) according to upper-orthant (respectively, lower-

orthant) dominance if for all (z1 , . . . , zn ), P (Yi ≥ zi ∀i) ≥ P (Xi ≥ zi ∀i) (respectively, P (Yi ≤ zi ∀i) ≥ P (Xi ≤ zi ∀i)).
4
Müller (2013) notes that “The study of mass transfer principles as described above has recently found increasing
interest in the economics literature in the context of comparing multivariate risks, see, e.g., [109, 318, 334]. Indeed,5Our elementary transformations are also reminiscent of Rothschild and Stiglitz’s (1970) meanpreserving spreads. Indeed, our transformations may be described as “marginal-preserving alignments”. While the structure of our theorem characterizing the supermodular ordering in terms of
marginal-preserving alignments parallels the structure of Rothschild and Stiglitz’s theorem for theunivariate convex ordering, there is an important difference: our set of elementary transformations
is minimal, whereas theirs is not.5
Section 5 applies the supermodular ordering to study the comparison of ex post inequality; theimpact of preference alignment among the members of a search committee on equilibrium search;
the effect of the configuration of banking networks on systemic risk; multidimensional measuresof welfare; the richness of datasets for prediction and parameter estimation; and the efficiency ofmatching mechanisms in the presence of frictions.

2

Setting and Characterization Results

For any fixed n, we consider distributions over a finite, n-dimensional lattice L constructed asfollows. The ith variable takes values in a totally ordered set (Li , ≤i ) with mi < ∞ elements. L
is defined as the Cartesian product ×i Li , endowed with the usual partial order: x ≤ y if and only
if xi ≤i yi for all i ∈ N ≡ {1, . . . , n}. Each Li is order-isomorphic to a finite subset of R and thereader may without loss think of L as a (possibly uneven) finite lattice built on a hyperrectangle ofRn . For any x ∈ L, let x + ei denote the element y of L, whenever it exists, such that yj = xj for
all j ∈ N \ {i} and yi is the smallest element of Li greater than but not equal to xi . For example,
if L = {0, 1}2 , (0, 0) + e1 = (1, 0) and (1, 0) + e2 = (0, 0) + e1 + e2 = (1, 1).
Q
Vectorial structure. Labeling arbitrarily the d = ni=1 mi elements (or “nodes”) of L, one
may view each real-valued function defined on L as a vector of Rd , where each coordinate is thevalue of the function evaluated at a specific node of L. In particular, a multivariate distribution
whose support is contained in L may be represented as an element of the unit simplex ∆d of Rd .
the basic principle that is used in this paper has already been used in [318, 334] for the special cases of supermodular ordering and inframodular ordering.” Here, ‘318’ refers to a 2011 version of the present paper entitled “TheSupermodular Stochastic Ordering.”
5
For the support {0, 1, 2, 3}, consider the mean-preserving spread (MPS) which adds probability mass  to outcomes
0 and 3 and removes mass  from outcomes 1 and 2. This MPS can be decomposed into the sum of two MPSs, thefirst (resp., second) of which adds mass  to outcomes 0 and 2 (resp., 1 and 3) and removes mass 2 from outcome 1(resp., 2). For this support, these two MPSs constitute a minimal set.

6

Orderings of distributions. For any function w : L → R and distribution f ∈ ∆d , theexpected value of w given f is the scalar product of w with f , seen as vectors of Rd :E[w|f ] =X

w(x)f (x) = w · f.

x∈L

To any class W of functions on L corresponds an ordering of multivariate distributions:f ≺W g⇐⇒∀w ∈ W,E[w|f ] ≤ E[w|g].

(1)

We will be particularly interested in the orderings generated by supermodular, increasing supermodular, and symmetric supermodular objective functions.
Supermodular functions and elementary transformations. For any x, y ∈ L, let x∧y andx ∨ y respectively denote the component-wise minimum (or “meet”) and component-wise maximum(or “join”) of x and y.6 A function w is supermodular (on L) if w(x ∧ y) + w(x ∨ y) ≥ w(x) + w(y)for all x, y ∈ L, and submodular if −w is supermodular. Let S denote the set of supermodular
functions. The supermodular ordering (denoted ≺SP M ) is the ordering defined by (1) for theclass S. For random vectors X and Y with distributions f and g and cumulative distributions
F and G, respectively, we will use the expressions X ≺SP M Y , f ≺SP M g, and F ≺SP M Ginterchangeably.
To characterize the supermodular ordering, we introduce a class of elementary transformations
capturing “increasing interdependence”. For any x ∈ L such that x + ei + ej ∈ L, let txi,j denotethe function defined on L by
txi,j (x) = txi,j (x + ei + ej ) = 1,

txi,j (x + ei ) = txi,j (x + ej ) = −1,(2)

and txi,j (y) = 0 for all other y ∈ L. We call txi,j an elementary transformation on L, and let T
denote the set of all elementary transformations.
If distributions f and g are such that g = f +αtxi,j for some α ≥ 0, then we say that g is obtained
from f by an elementary transformation with weight α. The α-weighted elementary transformation
raises the probability of nodes x and x + ei + ej by the common amount α, reduces the probabilityof nodes x + ei and x + ej by the same amount, and leaves unchanged the probability of all othernodes in L. Intuitively, such transformations increase the degree of interdependence of a multivariate distribution, as for some pair of components i and j, they make jointly high and jointly
low realizations more likely, while making realizations where one component is high and the other6

Explicitly, (x ∧ y)i = min{xi , yi } and (x ∨ y)i = max{xi , yi } for all i ∈ N .

7

low less likely. Furthermore, they raise interdependence without altering the marginal distribution of any component. Thus, our elementary transformations could alternatively be described as“marginal-preserving alignments”.
To illustrate, consider the 3×3 lattice L = {0, 1, 2}2 . There are four elementary transformations,corresponding to x = (0, 0), (1, 0), (0, 1), and (1, 1). For the 2 × 2 × 2 lattice L = {0, 1}3 , there are
six elementary transformations, one corresponding to each face of the unit cube. Note that eachelementary transformation affects only two of the n dimensions (as illustrated by the example of
L = {0, 1}3 ), and it affects values only at four adjacent points in the lattice, x, x + ei , x + ej , andx + ei + ej (as illustrated by L = {0, 1, 2}2 ).7
Theorem 1 f ≺SP M g if and only if there exist nonnegative coefficients {αt }t∈T such that, withf , g, and t seen as vectors of Rd ,
g=f+

X

αt t.

(3)

t∈T

Since any elementary transformation t ∈ T leaves the marginal distributions unchanged, Theorem 1 implies that f and g must have identical marginal distributions whenever f ≺SP M g. In
addition, the theorem also implies that distributions that are comparable according to the supermodular ordering are essentially characterized by their covariance matrix, in the following sense.
Proposition 1 Given random vectors X and Y with distributions f and g, respectively, if f ≺SP M
g and, for all i 6= j, Cov(Xi , Xj ) = Cov(Yi , Yj ), then f = g, that is, X and Y are identically
distributed.
For many applications, the choice of a particular support is somewhat arbitrary. For example,
when comparing multivariate empirical distributions of attributes such as income, health, andeducation (see Section 5.4), the distributions depend on the way the data for each attribute has been
aggregated into discrete categories. One very appealing property of the supermodular ordering, that
follows directly from Theorem 1, is that it is robust to coarsening of the support (aggregation),
as well as to any weakly monotonic transformation of coordinates.8 To see this, suppose that7

Our marginal-preserving alignments are broadly analogous to Rothschild and Stiglitz’s (1970) mean-preserving

spreads. However, as defined by Rothschild and Stiglitz, a mean-preserving spread can alter the probabilities of four
arbitrarily distant points. With a discrete support, the analog to our restriction that elementary transformations
affect only two dimensions and adjacent points would be the restriction that mean-preserving spreads affect theprobabilities of only three adjacent points.
8
In contrast, the ranking of bivariate distributions according to the linear correlation coefficient is not robust to
weakly monotonic transformations of coordinates and, a fortiori, not robust to coarsening of the support. To see

8each point (x1 , . . . , xn ) ∈ L is transformed to (r1 (x1 ), . . . , rn (xn )), for some set of nondecreasing
functions {ri }i , and denote the transformed support by Lr . In the special case where all {ri }i arestrictly increasing, there is a one-to-one mapping between elementary transformations on L andelementary transformations on Lr ; if instead x and x + ei (or x and x + ej ) are transformed into
the same point in Lr , then the transformation txi,j is mapped into the zero function on Lr . Hence,
it follows from Theorem 1 that for {ri }i nondecreasing, (X1 , . . . , Xn ) ≺SP M (Y1 , . . . , Yn ) implies(r1 (X1 ), . . . , rn (Xn )) ≺SP M (r1 (Y1 ), . . . , rn (Yn )). Moreover, for {ri }i strictly increasing, the reverse
implication holds as well.9

2.1

Comparing Empirical Distributions

Two aspects of our approach greatly facilitate the use of Theorem 1 to determine, given a pairof distributions f and g, whether f ≺SP M g. The first is our restriction to a finite support L.10
The second is our restriction that elementary transformations, defined in (2), affect only two of
the n dimensions and affect values at only adjacent points in the lattice. These two restrictions
make it straightforward, either manually or algorithmically, to list the entire set T of elementarytransformations on any given L. In fact, our set of elementary transformations is minimal, in thefollowing sense:
Proposition 2 All elements of T are extreme rays of the convex cone C(T ) generated by T .
This proposition says that we are working with the smallest set of elementary transformations
for which the characterization provided by Theorem 1 is valid. For the special case of bivariate
distributions, this result provides (see the Appendix) a very simple constructive proof of Theorem 1,
uniquely identifying, for f and g such that f ≺SP M g, the nonnegative coefficients {αt }t∈T in thePdecomposition g − f = t∈T αt t. Proposition 2 is also very useful for the two methods we develop
below for comparing multivariate empirical distributions.
Comparing two distributions
this, for L = {l, m, h}2 , where l < m < h, let (Y1 , Y2 ) have distribution g, where g(l, m) = g(m, l) = g(h, h) = 31 , andlet (X1 , X2 ) have distribution f , where f (l, l) = f (m, h) = f (h, m) = 13 . Then corr(Y1 , Y2 ) > (<) corr(X1 , X2 ) if(l+h)
> (<) m. This in turn implies that if L is coarsened by combining the realizations l and m in each dimension,
2

then corr(Y1 , Y2 ) > corr(X1 , X2 ), while if instead m and h are combined, then corr(Y1 , Y2 ) < corr(X1 , X2 ).
9
An alternative proof of the first implication uses the fact that for w(x1 , . . . , xn ) supermodular and {ri }i nondecreasing, w(r1 (x1 ), . . . , rn (xn )) is also supermodular. See Shaked and Shanthikumar (1997, Theorem 2.2).
10
Theorem 5 (Section 6.1) may also be used, in conjunction with Theorem 1, to compare distributions on acontinuous support using our techniques, as long as the distributions have a continuous density.

9

From Theorem 1, f ≺SP M g if and only if there exist nonnegative coefficients {αt }t∈T suchP
that g − f = t∈T αt t. For a given pair of distributions f and g, we can formulate the problem ofdetermining whether such a set of coefficients exists as a linear programming problem. Let T = |T |denote the number of elementary transformations on L, and let E denote the d × T -matrix whose
columns are the d-dimensional vectors consisting of all elementary transformations of L. Theorem 1
can be re-expressed as follows: f ≺SP M g if and only if there exists α ∈ RT nonnegative such thatEα = g − f . Let δ + denote the vector of Rd whose ith component equals |(g − f )i | and E + denotethe matrix whose ith row, denoted Ei+ , satisfies Ei+ = (−1)εi Ei , where εi = 1 if (g − f )i < 0 and 0
otherwise. The condition Eα = g −f can be re-expressed as E + α = δ + . Now consider the following
linear program:11min(α,β)∈RT ×Rd

d
X

βi

E +α + β = δ+,subject toα ≥ 0,β ≥ 0.

(4)

i=1

Proposition 3 The linear program (4) always has an optimal solution. f ≺SP M g if and only ifPthe optimum value is zero, and in that case g = f + t∈T αt∗ t, where (α∗ , β ∗ = 0) is any solutionof (4).

Characterization of the supermodular ordering via inequalities
To compare many distributions, for example as part of a larger optimization problem, it isconvenient to generate once and for all, for a given support, an explicit characterization of thesupermodular ordering. Given any finite support L, we present a method for generating such a
representation in the form of a finite list of inequalities that are satisfied by the vector g − f if andonly if f ≺SP M g.
Recall that, by definition, f ≺SP M g if g − f makes a nonnegative scalar product with allsupermodular functions on L, seen as vectors of Rd . This condition can be reduced to a finite setof linear inequalities by exploiting the geometric properties of S. S is a convex cone such that w issupermodular (i.e., belongs to S) if and only if it makes a nonnegative scalar product with each of
the T elementary transformations on L as defined by (2). In matrix form, S = {w ∈ Rd : Aw ≥ 0},
where A = E 0 is the T × d matrix whose rows consist of all elementary transformations. Since
Aw ≥ 0 describes a finite set of linear inequalities, S is a polyhedral cone, and A is called therepresentation matrix of S. The Minkowski-Weyl Theorem (Ziegler, 1997) states that a cone ispolyhedral if and only if it has a finite number of extreme rays. In our context, this theorem
11This corresponds to the auxiliary program for the determination of a basic feasible solution described in Bertsimas

and Tsitsiklis (1997, Section 3).

10

implies that to any T × d representation matrix A corresponds a generating matrix R, with d rows
and a finite number of columns, such that
Aw ≥ 0⇐⇒w = Rλfor some vector λ ≥ 0.

The columns of the matrix R are the finite set of extreme rays of the cone S. The stochastic
supermodular ordering is thus entirely determined by the extreme rays of S, in thatE[w|f ] ≤ E[w|g]∀w ∈ S⇐⇒R0 (g − f ) ≥ 0.

The Minkowski-Weyl Theorem thus proves the existence, for any finite support L, of a finite list of
inequalities, one corresponding to each extreme ray of S, that entirely characterize the supermodular
ordering on L.
How can we determine the extreme rays of the cone of supermodular functions? The double
description method, conceived by Motzkin et al. (1953) and implemented by Fukuda and Prodon(1996) and Fukuda (2004), provides an algorithm to go back and forth between the descriptionsof a polyhedral cone in terms of its representation matrix A and its generating matrix R. In ourcontext, the representation matrix A, determined by the set of elementary transformations definedby (2), is straightforward to compute and generate in a program, for any support L. By applying
Fukuda’s implementation of the double description method, we have developed an algorithm thatprovides, given any L, the list of inequalities, one corresponding to each extreme supermodular
function, that characterize the supermodular ordering on L. We have computed these inequalities
for a range of problems that are intractable by hand. In the Online Appendix, we provide the codefor our algorithm and, for illustration, the set of inequalities that it yields when L = {0, 1}4 .
The fact that our set of elementary transformations is minimal has the practical benefit of greatly
simplifying the complexity of our algorithm. The complexity can be further reduced by aggregating
data into coarser categories (coarsening the support), and as discussed above, aggregation of data(coarsening) preserves the supermodular ordering. Thus, with an appropriate degree of coarsening,the double description method can be used to achieve a tractable comparison of distributions
according to the supermodular ordering.

2.2

The Increasing Supermodular Ordering

In many economic settings, we want to compare multivariate distributions not just with respect tointerdependence but also with respect to the levels of the random variables. A function w on L is
increasing if for any x ∈ L and i such that x + ei ∈ L, w(x + ei ) ≥ w(x). Let I denote the set of11increasing functions on L. For any x ∈ L and i such that x + ei ∈ L, let τix denote the function
on L such that τix (x) = −1, τix (x + ei ) = 1, and τix vanishes everywhere else. Let U denote the setof all such functions.12 It is easy to check that w belongs to I if and only if w · τ ≥ 0 for all τ ∈ U.
First-order stochastic dominance for distributions on L is defined byf ≺F OSD g ⇐⇒ w · f ≤ w · g∀w ∈ I.

(5)

It is easy to adapt the proof of Theorem 1 to show that f ≺F OSD g if and only if there exist
nonnegative coefficients {βτ }τ ∈U such that
g=f+

X

βτ τ.

(6)

τ ∈U

The increasing supermodular ordering (denoted ≺ISP M ) is defined as follows:f ≺ISP M g ⇐⇒ w · f ≤ w · g∀w ∈ S ∩ I.

In contrast to f ≺SP M g, f ≺ISP M g does not imply that f and g have identical marginals.
Rather, f ≺ISP M g implies that each marginal distribution of f is dominated by the corresponding
marginal distribution of g according to first-order stochastic dominance: this can be seen by taking,for each i ∈ N and each ki ∈ Li , w(z) = I{zi ≥ki } , which is both increasing and supermodular.
Theorem 2 below demonstrates that comparison of two distributions according to the increasing supermodular ordering can be decomposed into a two-step comparison, first comparing themarginals according to first-order stochastic dominance and then comparing the joint distributions, after correcting to ensure identical marginals, according to supermodular dominance.
To simplify notation, assume that Li = {0, 1, . . . , mi − 1} (as explained just before Section 2.1,
this labeling of values is without loss of generality). Given two distributions f and g with δ ≡ g − f ,define the function γ on L, to correct for differences in the marginals of f and g, as follows. Letγ(z) vanish everywhere except on the set L0 of z’s that have at most one positive component. For
any i ∈ N and k ∈ {1, 2, . . . , mi−1 }, denote by kei the element of L0 with ith component equal tok, and letγ(kei ) = P r(Yi = k) − P r(Xi = k) =

X

δ(z).

(7)

z:zi =k12

Note that each transformation in U affects only one of the n dimensions and affects values only at two adjacentpoints in the lattice. This narrow definition parallels our narrow definition of “marginal-preserving alignments” in(2) and has analogous advantages.

12Finally, let γ(0, 0, . . . , 0) be such thatPz∈L0 γ(z) = 0. SincePz∈L δ(z) =Pz∈L (g(z) − f (z)) = 0,

it follows from (7) that for all i and k, including k = 0,Xγ(z) =

z:zi =k

X

δ(z).

(8)

z:zi =kEquation (8) ensures that f + γ has the same marginal distributions as g, so f + γ and g canpotentially be compared according to ≺SP M .13 At the same time, γ contains all the informationneeded to determine whether the marginals of g first-order stochastically dominate the marginals
of f .
Theorem 2 The following statements are equivalent:
1) f ≺ISP M g.
2) There exist nonnegative coefficients {αt }t∈T , {βτ }τ ∈U such thata) γ =

Pτ ∈U βτ τ , andb) g = f + γ +Pt∈T αt t.

3) For each i, the ith marginal distribution of f is dominated by the ith marginal distribution ofg according to first-order stochastic dominance, and for all supermodular w, w ·(f +γ) ≤ w ·g.
It follows from Theorem 2 that when comparisons are restricted to distributions with identicalmarginals, the increasing supermodular ordering and the supermodular ordering are equivalent.

2.3

The Symmetric Supermodular Ordering

Symmetric objective functions play an important role in many economic applications. For example,
if the objective function is an ex post welfare function, imposing symmetry amounts to assuming
ex post anonymity across individuals. In finance and insurance contexts, losses may be evaluatedaccording to a convex function of the total loss across all assets or all insurance policies. Any convex
function of the sum of losses is both symmetric and supermodular in the individual losses. The
symmetric supermodular ordering, characterized in this section, will be used in the applications
developed in Sections 4, 5.1, and 5.3.
A lattice L = ×ni=1 Li is symmetric if Li = Lj for all i 6= j. A real-valued function f on asymmetric lattice L is symmetric on L if f (x) = f (σ(x)) for all x ∈ L and permutations σ.
13Strictly speaking, we are assessing whether for all supermodular w, w · g ≥ w · (f + γ); this way of expressing

greater interdependence in g than in f + γ is valid whether or not all elements of the vector f + γ lie in [0, 1].

13Given two distributions g and f on a symmetric lattice L, g dominates f according to thesymmetric supermodular ordering, written f ≺SSP M g, if and only if w · f ≤ w · g for all
symmetric supermodular functions w on L. For any function f defined on a symmetric lattice L,
the symmetrized version of f , denoted f symm , is defined byf symm (x) =1 X
f (σ(x)),n!

(9)

σ∈Σ(n)

where Σ(n) is the set of all permutations of N . If w is a supermodular function, then wsymm issupermodular. The following result, proved in Meyer and Strulovici (2012, Section 2.3), shows that
one can characterize the symmetric supermodular ordering in terms of the supermodular orderapplied to symmetrized distributions.
Proposition 4 Given distributions f, g defined on a symmetric lattice, f ≺SSP M g if and only if
f symm ≺SP M g symm .
To go further, we simplify notation once again by relabeling the points in the support so thatPn
L = {0, 1, . . . , m − 1}n . For x ∈ L and k ∈ {1, . . . , m − 1}, define c̄k (x) =i=1 I{xi ≥k} andc̄(x) = (c̄1 (x), . . . , c̄m−1 (x)). c̄k (x) counts the number of components of x that are at least as large
as k, and c̄(x) is the “cumulative count vector” corresponding to x. The vector c̄(x) lies in L̃m−1 , an(m − 1)-dimensional subset of {0, 1, . . . , n}m−1 . Since all permutations of x ∈ L correspond to thesame vector c̄(x), it follows that w is symmetric if and only if it can be written as w(x) = φ(c̄(x)),
for some φ defined on L̃m−1 .
The result below shows that for any number of dimensions n, the symmetric supermodular
ordering of random vectors X and Y on L is equivalent to an ordering of the derived random
vectors c̄(X) and c̄(Y ) on L̃m−1 . To state the result, we need the following definition. A function
φ on L̃m−1 is componentwise convex if for any y ∈ L̃m−1 and k = {1, 2, . . . , m − 1} such thaty + 2ek ∈ L̃m−1 , φ(y) + φ(y + 2ek ) ≥ 2φ(y + ek ).
Proposition 5 For random vectors X and Y distributed on L = {0, 1, . . . , m − 1}n , X ≺SSP M Y
if and only if Eφ(c̄(X)) ≤ Eφ(c̄(Y )) for all supermodular and componentwise convex functions φPdefined on L̃m−1 . In the special case where m = 2, X ≺SSP M Y if and only if Eφ( ni=1 I{Xi =1} ) ≤P
Eφ( ni=1 I{Yi =1} ) for all convex functions φ defined on {0, 1, . . . , n}.
In the special case m = 2, each component of the random vectors X and Y has a binary support{0, 1}. In this case, whatever the dimension of X and Y , Proposition 5 shows that comparison of X
P
and Y according to the symmetric supermodular ordering reduces to comparison of ni=1 I{Xi =1}
14

and

Pn

i=1 I{Yi =1} according to the well-understood univariate convex ordering, which is equivalent

to the ordering of greater riskiness studied by Rothschild and Stiglitz (1970).
More generally, Proposition 5 is useful because, even as the dimension n of the underlying
random vectors X and Y increases, the dimension of the derived random vectors c̄(X) and c̄(Y )remains fixed at m − 1. We will use this proposition in Section 5.3, where we apply the symmetricsupermodular ordering to compare systemic risk for different networks of financial linkages acrossbanks.

3Aggregate and Idiosyncratic Shocks

In economics, particularly macroeconomics and finance, the interdependence of random variables
often arises from the presence of aggregate shocks or common factors. This section focuses on
mixture distributions, representing random vectors generated by both aggregate and idiosyncratic
shocks, and provides non-parametric sufficient conditions for one such random vector to display
more interdependence, in the sense of the supermodular ordering, than another. The following
example will help to motivate our analysis.
Example 1 Let the random vector X be such that Xr = θ + εr , where θ and {εr }r∈N are all
independent and have binomial distributions B(ηθ , p) and B(ηε , p), respectively, with p ∈ (0, 1)
and ηε = η − ηθ . An increase in ηθ raises each pairwise covariance Cov(Xr , Xs ) while leaving themarginal distribution of each Xr unchanged at B(η, p). Theorem 3 below can be used to show
(Appendix D) that raising the importance of the common shock θ by increasing ηθ makes therandom variables (X1 , . . . , Xn ) more supermodularly dependent.. In addition, if we set ηθ = λθ /p,ηε = λε /p and let p go to zero while holding λθ and λε fixed, the limiting distributions of θ and{εr }r∈N are Poisson with parameters λθ and λε , respectively. Hence this example also implies thatfor Poisson distributed random variables Xr = θ +εr , when λθ increases, holding λθ +λε (and hence
the marginal distribution of each Xr ) fixed, (X1 , . . . , Xn ) become more supermodularly dependent.
A similar result was known for Xr = θ +εr when θ and {εr } are normally distributed: increasing
the variance of θ, while leaving the variance of each Xr unchanged, makes the random vector X
more supermodularly dependent.14 This result can also be recovered from our example, using thefact that normal distributions may be obtained as the limit of binomial distributions. However, even
14

This follows from Müller and Scarsini’s (2000) result that for random vectors Y and Z with multivariate normal

distributions, the condition Cov(Yr , Ys ) ≤ Cov(Zr , Zs ) for all r 6= s, coupled with identical marginal distributions,
implies that Y ≺SP M Z.

15

with the additive structure Xr = θ + εr , for arbitrary distributions an increase in each Cov(Xr , Xs )does not generally make X more supermodularly dependent.15
The process generating a random vector as a mixture distribution can be decomposed into two
steps: first, the realization of the “aggregate” shock selects, for each component of the random
vector, one distribution out of many possible ones; second, for each component, independently, an
outcome is drawn from the distribution randomly selected.16 We consider all mixture distributions,with the restriction that the outcomes of each step can take finitely many values and the mixture
weights (in the distribution of the aggregate shock) are rational. With this restriction, we canrepresent any random vector with a mixture distribution in the following manner.
To each variable Xr , r ∈ N , is associated a q × mr row-stochastic matrix A(r), where eachrow of A(r) represents a probability distribution for the variable Xr on some finite support with
mr values. The vector (X1 , . . . , Xn ) is constructed as follows. First, a row index i ∈ {1, . . . , q}
is drawn randomly, according to a uniform distribution over the q possible values. This step
represents the realization of the aggregate shock.17 Then, each variable Xr is independently drawn
from the distribution described by the ith row of A(r). This step represents the realization of
the idiosyncratic shocks. The unconditional marginal distribution of each Xr is described by the(equally-weighted) average of the rows of A(r). Without loss of generality, we take the support ofeach random variable Xr to be {1, . . . , mr }.
For the representation of mixture distributions described above, greater importance of theaggregate shock relative to the idiosyncratic shocks should correspond, for each matrix A(r), tothe rows being more different from one another, holding the average of the rows of each A(r), andhence the unconditional distribution of each Xr , fixed.
The following terminology and notation will be useful to formalize this idea. For any q × m
Pmatrix A, the entries of the (upper) cumulative-sum matrix Ā of A are defined by Āi,j = m
k=j Ai,k .
Thus, Āi,j is decreasing in j. If A is row-stochastic, the first column of Ā has all entries equal to 1.
Clearly, there is a one-to-one mapping between row-stochastic matrices and their cumulative-sum
equivalents.
A row-stochastic matrix A is stochastically ordered if for each k, Āi,k is weakly increasing in
15
16

See the example in Section B of the Appendix.
In the statistics literature, the distributions described below are often referred to as unidimensional latent variable

models (Holland and Rosenbaum, 1986).
17
The analysis can easily be extended to accommodate non-uniform distributions of the aggregate shock, by appropriate replications of the rows of the matrix, as long as these distributions have finite supports and rational
weights.

16

i. This is equivalent to the condition that for all i ∈ {2, . . . , q}, the ith row of A dominates the(i − 1)th row in the sense of first-order stochastic dominance, so that higher-index aggregate shocks
are more likely to yield high outcomes for the variable X generated by A. Given a row-stochastic
matrix A, the stochastically-ordered version of Ā, denoted Āso , is the stochastically-ordered matrix
obtained from Ā by reordering each of its columns from the smallest to the largest element. If A
is itself stochastically ordered, then Āso = Ā, and in this case we will use the expressions “A isstochastically ordered” and “Ā is stochastically ordered” interchangeably.
Our ordering of matrices builds upon Hardy, Littlewood, and Polya’s (1934, 1952) definition ofmajorization, which formalizes greater dispersion in the elements of a vector.
Definition 1 A vector a majorizes a vector b of identical dimension if i) the sums of the elementsof a and b are equal, and ii) for all k, the sum of the k largest entries of a is weakly greater than
the sum of the k largest entries of b .
We now present our ordering of matrices, which we term “cumulative column majorization”,
that formalizes the idea that the rows of a matrix A are “more different” from one another than
the rows of B (holding the average of the rows fixed).
Definition 2 Given two row-stochastic matrices A and B of dimension q × m, A dominates B
according to the cumulative column majorization criterion, denoted A CCM B, if for allk ≤ m, the k th column vector of Ā majorizes the k th column vector of B̄. Equivalently, A CCM BPqPso
if for for all l ≤ q and k ≤ m, qi=l Āsoi,k ≥i=l B̄i,k , with equality holding for l = 1, for all k ≤ m.
Note that the definition of A CCM B requires that Ā and B̄ have equal column sums. Hence,
if random variable X is generated by matrix A and random variable Y by B, A CCM B implies
that the unconditional distributions of X and Y are identical.
The main result of this section is the following theorem, providing sufficient conditions for
random vectors X and Y with mixture distributions to be ranked according to the supermodular
ordering.
Theorem 3 Let (A(1), . . . , A(n)) and (B(1), . . . , B(n)) be two sets of row-stochastic matrices generating the random vectors (X1 , . . . , Xn ) and (Y1 , . . . , Yn ), respectively, with for each r ∈ N , A(r)and B(r) having dimension q × mr . Suppose that, i) for each r ∈ N , A(r) is stochastically ordered,and ii) for each r ∈ N , A(r) CCM B(r). Then (X1 , . . . , Xn ) SP M (Y1 , . . . , Yn ).

17

We have examples showing that the theorem does not hold if we drop either condition i) or
ii).18 We conjecture that Theorem 3 can be extended to the case where the aggregate shock or the
random vectors have continuous supports.19
The condition that for each r, A(r) CCM B(r) says that the realization of the aggregate shockis relatively more informative about what the realizations of {Xr }r∈N will be than about what therealizations of {Yr }r∈N will be. In the special case where the matrices A(r) and B(r) are bothstochastically ordered, A(r) CCM B(r) reduces to
q X
mrX
i=l j=kAi,j (r) =

q
X
i=l

Āi,k (r) ≥qXB̄i,k (r) =

q X
mr
X

Bi,j (r) ∀l ≥ 2, k ≥ 2,

(10)

i=l j=ki=lcoupled with the condition that A(r) and B(r) have matching column sums. Since higher values of icorrespond to higher realizations of the aggregate shock and higher values of j to higher realizationsof Xr , the condition in (10) can be read as saying that the matrix A(r) dominates B(r) in the senseof “upper-orthant dominance”.20
Example 2 Consider the n-dimensional random vectors X, Y , Z, and V with symmetric mixture
distributions on support L = {1, 2, 3}n , generated by the 2×3 matrices A, B, C, and D, respectively:








1
1
1
1
1
1
3
0 1 0
0
0
 B= 2 4 4  C= 4 4
 D=

A= 2 2
1
1
1
1
1
1
1
3
1
0 2 2
0 4 4
4
4
2
2 0 2
18

Jogdeo (1978) showed that for any stochastically ordered row-stochastic matrices {A(r)}, the distribution of(X1 , . . . , Xn ) generated from them displays association, a widely-used dependence concept defined in Esary, Proschan,and Walkup (1967). It follows from this and Theorem 2 of Meyer and Strulovici (2012) that the distribution of(X1 , . . . , Xn ) dominates its independent counterpart (the independent distribution with identical marginals to X)
according to the supermodular ordering. This result corresponds to the special case of Theorem 3 where for each r,
the matrix B(r) consists of q identical rows.
19
If sequences of random vectors {Xs } and {Ys } satisfy Xs SP M Ys for all s and respectively converge in law
to X and Y , then X SP M Y . To handle, say, an aggregate shock that was uniformly distributed on [0, 1], thestrategy would be to construct sequences of matrices {A(r)s } and {B(r)s }, representing finer and finer discrete
uniform distributions of the aggregate shock, and to apply Theorem 3 to the sequences of random vectors {Xs } and{Ys } generated by these matrices. For the continuous analogues of the matrices A(r) and B(r), it is straightforward
to define the continuous analogue of condition i) in Theorem 3, and the definition of cumulative column majorization
can be replaced with a notion of cumulative column Lorenz dominance. One would then need to show that giventhese conditions on the continuous analogues of A(r) and B(r), each pair of discretizations A(r)s and B(r)s satisfies
the conditions of Theorem 3.
20
Comparisons of row-stochastic matrices underlie Athey and Levin’s (2001) analysis of the informativeness of
signal structures, Dardanoni’s (1993) ordering of mobility, and Andreoli and Zoli’s (2014) comparisons of segregationand discrimination. All of these papers, however, require both of the matrices being compared to be stochasticallyordered, whereas in our work, the dominated matrix need not be.

18

The rows of each matrix have the same arithmetic average, ( 141 1
2 4 ), which represents the common

marginal distribution of each Xr , Yr , Zr , and Vr . A, B, and C are stochastically ordered, so in
each, the first (second) row unambiguously corresponds to a low (high) realization of the aggregate
shock. D, however, is not stochastically ordered. It is easily checked that A CCM B, A CCM C,
and A CCM D. These conditions formally capture the fact that in A, the distribution of thevariables conditional on the low (high) realization of the aggregate shock is more concentrated onlow (high) values, compared to any of B, C, and D. Hence Theorem 3 implies that for any n,(X1 , . . . , Xn ) dominates (Y1 , . . . , Yn ), (Z1 , . . . , Zn ), and (V1 , . . . , Vn ) according to SP M .21
Theorem 3 has potential applications in several areas of economics. In finance and insurance
contexts, the supermodular ordering is useful for comparing the degree of dependence among asset
returns or insurance claims in a portfolio.22 In contrast to the approach taken by Epstein andTanny (1980) and Patton (2009), who compare only bivariate distributions, we can, by focusing
on mixture distributions, compare interdependence according to the supermodular ordering for
portfolios with any number of distinct components. Mixture distributions are increasingly usedby financial economists to model positively dependent risks in a portfolio, but our theorem yields
supermodular dominance results for a wider class of such distributions than previous analyses (e.g.
Cousin and Laurent, 2008). Macroeconomists seeking to understand the sources of variation inaggregate production are naturally interested in the interdependence of output levels across sectors.
Hennessy and Lapan (2003) have in fact proposed using the supermodular ordering to make suchcomparisons of “systematic risk”. In the spirit of our mixture distribution analysis, Foerster,
Sarte, and Watson (2011) have empirically explored how the relative importance of aggregate vs.
sectoral shocks affects the covariation of output levels across sectors and hence the volatility ofoverall output. In a similar spirit, theoretical analyses of coordination games have used mixture
distributions to examine how changes in the degree of interdependence in agents’ information
sources affect the volatility of aggregate behavior (Myatt and Wallace, 2012). Theorem 3 provides
21

For symmetric mixture distributions generated from two-row matrices and for any n ≥ 2, we can show that thepair of conditions in Theorem 3 are necessary as well as sufficient for X SP M Y . Example 2 illustrates this result.
B and C cannot be ranked according to CCM , so it follows from the necessity of the CCM condition that Y and Z
cannot be ranked according to SP M . In fact, because the third column of C̄ majorizes (strictly) the third columnof B̄, we can deduce that for w(x) = I{x1 ≥3,x2 ≥3} , Ew(Z) > Ew(Y ), and because the second column of B̄ majorizes(strictly) the second column of C̄, we can deduce that for w(x) = I{x1 ≥2,x2 ≥2} , Ew(Y ) > Ew(Z). Moreover, eventhough D CCM B, because D is not stochastically ordered, it follows that V does not supermodularly dominate Y ;this can be checked by taking w(x) = I{x1 ≥3,x2 ≥2} .
22
See Müller and Stoyan (2002) and Denuit, Dhaene, Goovaerts, and Kaas (2005).

19

a flexible method for generating or modeling distributions that are comparable according to thesupermodular ordering, by changing the relative importance of aggregate and idiosyncratic shocks.

4Comparing Lotteries

Let (X1 , . . . , Xn ) ∈ {0, 1}n (resp., (Y1 , . . . , Yn ) ∈ {0, 1}n ) denote the outcomes of n independentP
Bernoulli trials, where the probability of success (outcome=1) on trial i is ai (resp., bi ). If ni=1 ai =Pn
i=1 bi , so the expected number of successes is the same for the random vector X as for Y , whatPP
can be said about the relative variability of the distributions of ni=1 I{Xi =1} and ni=1 I{Yi =1} ?
Using the univariate convex ordering as a measure of variability, Karlin and Novikoff (1963) showed
P
Pthat if (a1 , . . . , an ) majorizes (b1 , . . . , bn ), then Eφ( ni=1 I{Xi =1} ) ≤ Eφ( ni=1 I{Yi =1} ) for all convex
functions φ defined on {0, 1, . . . , n}.
To develop an intuition for why a less dispersed vector of success probabilities generates greater
variability of the total number of successes, consider the case where n = 2, (a1 , a2 ) = (1, 0), andPP(b1 , b2 ) = ( 34 , 14 ). Then ni=1 I{Xi =1} = 1 with probability 1, while ni=1 I{Yi =1} takes the values
3 5 3{0, 1, 2} with probabilities { 16
, 8 , 16 }.

Propositions 4 and 5, combined with Karlin and Novikoff’s result, imply that if (a1 , . . . , an )majorizes (b1 , . . . , bn ), then i) (X1 , . . . , Xn ) ≺SSP M (Y1 , . . . , Yn ) and ii) the symmetrized version of
the distribution of X is dominated by the symmetrized version of the distribution of Y according
to the supermodular ordering.
In what follows, let X 0 = (X10 , . . . , Xn0 ) denote the random vector whose distribution matches
the symmetrized distribution of the random vector X, and define Y 0 similarly. In the example
above, the distribution of (X10 , X20 ) places probability 21 on (1, 0) and (0, 1), while that of (Y10 , Y20 )5
3places probability 16
on (1, 0) and (0, 1) and probability 16
on (1, 1) and (0, 0). These two joint

distributions have identical (uniform) marginals on {0, 1}. Clearly, (X10 , X20 ) ≺SP M (Y10 , Y20 ), since3.
the distribution of Y 0 is obtained from that of X 0 by an elementary transformation of size 16

Moreover, whereas the distribution of (Y10 , Y20 ) displays some negative dependence, the distributionof (X10 , X20 ) displays perfect negative dependence. Finally, note that had we started with a uniform
vector of success probabilities for the independent trials (i.e., ( 21 , 12 )), then the resulting multivariate
outcome distribution would have been symmetric, so even after symmetrization it would havedisplayed independence.
The example illustrates that lower dispersion in the vector of success probabilities corresponds
not only to higher variability of the total number of successes, but also to symmetric supermodular

20dominance of the n-dimensional outcome distribution. Furthermore, when an independent distribution on {0, 1}n with unequal marginals is symmetrized, the symmetrized version displays negativeinterdependence, and is more negatively interdependent the more different from one another are
the marginals of the original, independent distribution.
This section focuses on multivariate distributions representing the outcome of n independent
lotteries with an arbitrary finite support, exploring the connections between lower dispersion inthe (marginal) distributions of the independent lotteries, the symmetric supermodular ordering on
the joint distribution of lottery outcomes, and the degree of negative interdependence in the symmetrized versions of these joint distributions. Given two sets of n independent lotteries, Theorem 4
provides sufficient conditions for their outcome distributions to be comparable according to thesymmetric supermodular ordering, or equivalently, for the degree of negative interdependence ofthe symmetrized versions of their outcome distributions to be comparable according to the supermodular ordering. We show below how Theorem 4 can be used to compare different production
designs in the presence of complementarity among tasks and in Section 5.1 how it can be used tocompare ex post inequality of reward schemes under uncertainty.
We consider random vectors (X1 , . . . , Xn ) and (Y1 , . . . , Yn ) generated by n × m row-stochastic
matrices A and B, respectively, as follows: the ith row of A (resp. B) represents the marginal
distribution of Xi (resp. Yi ) on support {1, . . . , m}, and the {Xi } (resp. {Yi }) are independent.23
Just as above we compared sets of n independent Bernoulli trials with the same average successprobability, here we compare sets of n independent lotteries with the same average distribution
over the m prizes. This constraint translates into the requirement that for each j, the j th columnof A has the same sum as the j th column of B.
Denote by (X10 , . . . , Xn0 ) and (Y10 , . . . , Yn0 ) the random vectors whose distributions match thesymmetrized distributions of (X1 , . . . , Xn ) and (Y1 , . . . , Yn ), respectively. The common marginal
distribution of the {Xi0 } is the average of the rows of matrix A. Hence, requiring that the matrices
being compared have matching column sums implies that the common marginal distribution of the{Xi0 } is identical to that of the {Yi0 }.
In the Bernoulli example above, dispersion of the n-vector of success probabilities was captured
by majorization. For n lotteries with m-point supports, represented by the n rows of a matrix,
our cumulative column majorization ordering defined in Section 3 formalizes the notion of greater
dispersion in the lotteries, holding their average fixed.
23

The choice of support {1, . . . , m} for each Xi and Yi is without loss of generality, since the symmetric supermodular

ordering is invariant to monotonic coordinate changes that preserve the symmetry of the lattice.

21

Theorem 4 below provides sufficient conditions for two sets of independent lotteries to be comparable according to the symmetric supermodular ordering. These sufficient conditions are very
closely related to the sufficient conditions for supermodular dominance of mixture distributions
identified in Theorem 3, and the techniques for proving these theorems are likewise very similar.
Theorem 4 Let A and B be n × m row-stochastic matrices generating the independent random
vectors (X1 , . . . , Xn ) and (Y1 , . . . , Yn ), respectively. Let (X10 , . . . , Xn0 ) and (Y10 , . . . , Yn0 ) have distributions matching the symmetrized distributions of (X1 , . . . , Xn ) and (Y1 , . . . , Yn ), respectively. Suppose that i) A is stochastically ordered, and ii) A CCM B. Then (X1 , . . . , Xn ) ≺SSP M (Y1 , . . . , Yn )and (X10 , . . . , Xn0 ) ≺SP M (Y10 , . . . , Yn0 ).
As with Theorem 3, we have examples showing that Theorem 4 does not hold if we drop either
condition i) or ii).24
As a first application of Theorem 4 (a second is developed in Section 5.1), we revisit Bond andGomes’s (2009) multi-task principal-agent model. Suppose that each row i of A and B represents the
distribution of performance, over m possible levels, on one of n tasks, and that performance levels
are independently distributed across tasks. The production function is symmetric and supermodular
in the performance levels on the different tasks, reflecting interchangeability and complementarity
among tasks. A manager must choose how to allocate resources across the different tasks, thereby
shifting the distributions of performance, subject to a constraint on the average distribution over
all tasks. Theorem 4 identifies conditions under which expected production is higher in one setting
than the other for all symmetric supermodular production functions.
Bond and Gomes focus on binary outcomes for each task (m = 2). An agent chooses a levelPei ∈ [e, e] of effort for each task i, incurring a total effort cost ni=1 ei . The probability of successon task i equals ei , and the principal’s benefit is assumed to be a convex function of the numberof successes, so it is a symmetric supermodular function of the vector of binary task outcomes.
P
For a given ni=1 ei , Bond and Gomes show that the socially efficient allocation of this total effort
involves equal effort on all tasks. However, the optimal contract rewarding the agent as a functionof the number of successes may well induce the agent to exert minimal effort e on a subset of tasks
and maximal effort e on the remainder. In this case, given the total effort exerted, the agent’s effort
24

Hu and Yang (2004, Theorem 3.4) showed that for any stochastically ordered row-stochastic matrix A, thesymmetrized version of the distribution of X displays negative association (a concept of negative dependence definedin Joag-Dev and Proschan (1983)), which in turn implies that this symmetrized version is supermodularly dominatedby its independent counterpart (the independent symmetric distribution with identical marginals). This latter result
corresponds to the special case of Theorem 4 where the rows of the matrix B are all identical.

22

allocation actually minimizes expected social surplus. Theorem 4 implies these conclusions about
the best and worst allocations from a social perspective.25
More generally, Theorem 4 allows us to examine, for arbitrary m and n, the existence, in thesense of the symmetric supermodular ordering, of a best and worst set of independent lotteries,
holding fixed the average distribution over the prizes. Because the symmetric supermodular ordering is a partial ordering, one should not generally expect the existence of a best and a worst
distribution. However, Proposition 11 (in the Appendix) shows that for the class of distributions
considered here, a best and a worst set of lotteries do indeed exist.

5

Applications

5.1

Welfare and Ex Post Inequality

When individual outcomes are uncertain, members of a group may be concerned, ex ante, about ex
post inequality.26 As argued by Meyer and Mookherjee (1987), an aversion (on the part of a groupor a social planner) to ex post inequality can be formalized by adopting an ex post welfare functionthat is symmetric and supermodular in the realized utilities of the individuals. Consider a specificillustration. Intuitively, when groups dislike ex post inequality, tournament reward schemes, which
distribute a fixed set of rewards among individuals, one to each person, should be particularly
unappealing. This suggests that tournaments should be dominated, in the sense of the symmetricsupermodular ordering, by reward schemes that provide each individual with the same marginal
distribution over rewards but determine rewards independently. Meyer and Mookherjee (1987)
proved this conjecture, but only for the special case of a symmetric tournament (one in which each
25

The effort allocation determines an n × 2 row-stochastic matrix, the second column of which is the vector of

success probabilities, and holding the total effort fixed corresponds to fixing the column sums of the matrix. With
two columns, any row-stochastic matrix can be converted into a stochastically ordered one by reordering rows (anoperation which will have no effect on the expected value of a symmetric objective function). Therefore, with
m = 2, Theorem 4 implies that, holding total effort fixed, if the vector of success probabilities from one effort
allocation majorizes the vector from another, then the former allocation generates lower expected social surplus, forall symmetric supermodular benefit functions. (Bond and Gomes’s conclusions also follow from Karlin and Novikoff’s(1963) result for Bernoulli trials, discussed above). The final step is to observe that a vector of equal successprobabilities is majorized by all vectors with the same total; and one in which all probabilities are either minimal or
maximal (e or e) majorizes all vectors with the same total.
26
See Meyer and Mookherjee, 1987; Meyer, 1990; Ben-Porath et al, 1997; Gajdos and Maurin, 2004; Hopkins andKornienko, 2010; Chew and Sagi, 2012; and Grant et al, 2012. This concern is distinct from concerns about the mean
and riskiness of rewards.

23

individual has an equal chance of winning each of the rewards), and their method of proof waslaborious. Theorem 4 can be applied to generalize this result to tournaments that are arbitrarily
asymmetric across individuals.
With n individuals and n distinct prizes, a “tournament” reward scheme allocates each of the
prizes to exactly one individual, and it is fully described by the probability it assigns to each of the n!
possible prize allocations. For welfare computations, a tournament may be summarized by a matrix
B that is bistochastic (both its columns and its rows sum to 1), where the ith row of B describes
individual i’s marginal distribution over the n prizes. The more asymmetric the tournament is,
the more disparate are the rows of the corresponding matrix B. Given any tournament, consider
the associated reward scheme giving each individual the same marginal distribution as in thetournament, but which determines individual rewards independently. For any tournament, however
asymmetric, Theorem 4 implies that expected ex post welfare under the tournament is less than orequal to expected ex post welfare under the independent joint distribution of rewards sharing thesame set of marginals, for all symmetric and supermodular ex post welfare functions.27
Proposition 6 For any number n of individuals, given any tournament, the joint distribution ofprizes under the tournament is dominated, according to the symmetric supermodular ordering, by
the independent joint distribution sharing the same set of marginals.

5.2

Search in Committees

There are many contexts where it is of interest to assess the degree of alignment in the preferences orinformation of members of decision-making groups.28 Modeling consensus-building in committees,
27

For a symmetric tournament, the joint distribution of rewards is dominated according to the supermodular

ordering by the independent joint distribution sharing the same set of marginals. To see why, when analyzing
tournaments that are arbitrarily asymmetric, we need to impose symmetry of the ex post welfare function, consider
the following tournament with n = 3: with probability 12 , prizes h, m, and l, where h > m > l, are allocated toindividuals 1, 2, and 3, respectively, and with probability 21 , h, m, and l are allocated to individuals 3, 1, and 2,
respectively. In this tournament, the rewards to 1 and 2 are positively dependent, even though the rewards to 1 and3 (as well as the rewards to 2 and 3) are negatively dependent. The positive dependence of the rewards to 1 and 2
implies that the tournament reward distribution is not supermodularly dominated by the corresponding independent
distribution. When we impose symmetry of the ex post welfare function, in addition to supermodularity, we arecomparing the “average” degree of negative interdependence across the whole set of individuals. Equivalently, as
Proposition 4 showed, we are comparing the interdependence of the symmetrized versions of the tournament reward
distribution and of the independent joint distribution with the same marginals.
28
See Boland and Proschan (1988) and Baldiga and Green (2013) on alignment of preferences, and Prat (2002) andGendron-Saulnier and Gordon (2014) on alignment of information.

24

Caillaud and Tirole (2007) study how the degree of interdependence of members’ ex ante uncertain
payoffs from a proposal affects the proposer’s persuasion strategy. In a model of search and voting,
Moldovanu and Shi (2013) examine how the degree of alignment in committee members’ preferences affects equilibrium search and welfare. Both papers focus on the unanimity rule and impose
restrictions on the payoff distributions: in Caillaud and Tirole, payoffs are binary, while Moldovanu
and Shi focus on a single-parameter family of payoff functions. Here, we use the supermodular
ordering as a non-parametric, n-dimensional ordering of interdependence in preferences and adapt
and generalize Moldovanu and Shi’s analysis of search and voting.
Job candidates are interviewed sequentially, without recall, by an n-person committee. The
period-t candidate has attribute vector Xt = (X1t , . . . , Xnt ), where Xt is i.i.d. across periods andhas a known distribution. Committee member i’s utility equals Xit if the period-t candidate ishired (in which case search stops), and i incurs search cost ci of evaluating attribute i for eachnew candidate. We suppose initially that unanimous approval is required for a candidate to be
hired, otherwise search continues. If (Y1 , . . . , Yn ) ∼ g, (X1 , . . . , Xn ) ∼ f , and (Y1 , . . . , Yn ) SP M
(X1 , . . . , Xn ), we will say that members’ interests are more aligned when the values of the attributes
are distributed according to g than when they are distributed according to f .
In equilibrium, each member i chooses a reservation level zi for attribute i, and the equilibrium
reservation levels (z1 , . . . , zn ) satisfy the n simultaneous equationshici = E (Xi − zi )I{Xj ≥zj ∀j} ,i = 1, . . . , n.

(11)Each member i equates his cost of one more search with the expected gain from one more search,assessed relative to stopping now and obtaining zi . Since search will stop next period if and only if
all members approve the next candidate, the expected gain to member i depends on the reservationlevels of the others via the factor I{Xj ≥zj ∀j} multiplying (Xi − zi ).
The key observation is that the gain to each member i from one more search (square brackets
in (11)) is supermodular in (X1 , . . . , Xn ) for all (z1 , . . . , zn ). To see this, rewrite this expressionQ
as nj=1 rj (Xj , zj ), where each rj (Xj , zj ) is nonnegative and increasing in Xj . Supermodularity
implies that, as interests become more aligned, each member’s expected gain from one more searchincreases. Since the right-hand side of (11) is decreasing in zi , a greater alignment of interests
implies that the optimal zi increases, for all z−i . It follows that if the committee is symmetric (ci = c
for all i and the distributions of attributes are symmetric across members), then a greater alignment
implies that the common equilibrium reservation value increases: members become choosier.
To examine how the impact of greater alignment of interests depends on the voting rule, suppose25

now that a candidate is hired if and only if at least m of the n members vote to stop searching.
For given (z1 , . . . , zn ), let K(z1 , . . . , zn ) = {k|Xk ≥ zk }. The equilibrium reservation levels satisfyci = E (Xi − zi )I{|K|≥m} ,i = 1, . . . , n.

(12)

When unanimity is required to reject a candidate (m = 1), the expression in square brackets canbe written as (Xi − zi ) + |Xi − zi |I{Xj <zj ∀j} , which is again supermodular in (X1 , . . . , Xn ), for all(z1 , . . . , zn ).29 Consequently, for this alternative voting rule, the same comparative statics result
as above holds.
Proposition 7 For symmetric committees of any size, equilibrium search becomes longer as committee members’ interests become more aligned, both when the voting rule requires unanimity for
accepting a candidate and when it requires unanimity for rejecting one.
However, for intermediate voting rules, the realized gain from one more search is no longer
supermodular everywhere.30 This failure can have a bite: we have examples with three members
and the simple majority rule for which greater alignment in members’ interests results in lower
equilibrium reservation values and hence shorter search duration.

5.3

Systemic Risk and Financial Networks

Financial economists, stimulated by the financial crisis, have been developing measures of “systemicrisk”, capturing the interdependence of the components of the financial system as a whole.31
This application shows that changes in the structures of financial linkages between banks cannaturally lead to distributions of default risks that are ranked according to the symmetric supermodular ordering. We revisit the model developed by Allen, Babus, and Carletti (2012), who
consider a particular diversification strategy of banks, asset-swapping, and examine how the pattern of asset swaps affects market outcomes and welfare. We generalize a stylized version of their29

It is the sum of two supermodular functions, the second of which is supermodular because it can be written as

Qn

j=1 rj (Xj , zj ), where each rj (Xj , zj ) is nonnegative and decreasing.
30

To see why supermodularity can fail, observe that when two other committee members both switch their votefrom “no” to “yes”, this may be enough to hire a candidate such that i’s realized gain, Xi − zi , is strictly negative,
even when a switch by just one of the other two members would not be enough to get that candidate hired, in whichcase i’s realized gain would be 0.
31
For example, Adrian and Brunnermeier (2009) and Acharya et al (2010) develop measures of association between
negative events for an individual firm and negative events for the market. Beale et al (2011) study the interplay
between diversification at the level of the financial institution, which lowers individual risk, and increasing similarity
of institutions’ portfolios, which raises systemic risk.

26

model,32 focusing on how different patterns of asset swaps (represented by different networks)
generate multivariate distributions of bank failures with different degrees of interdependence.
Consider six banks and two networks of asset swaps, the “clustered” and the “unclustered”.
Each bank i funds a project with return θi ∈ {L, H}. The projects’ returns are i.i.d. with P (θi =H) = p. In the clustered network, banks 1,2, and 3 swap assets among themselves so that each ofPthem holds an identical portfolio with return Yi0 = 31 3j=1 θj for i ≤ 3, and similarly for banks 4,5,
and 6. In the unclustered network, banks are arranged in a circle, and each bank swaps one-thirdof its assets with each of its two neighbors, yielding returns Xi0 = 13 (θi−1 mod 6 + θi + θi+1 mod 6 )for all i. The marginal distribution of each bank’s return is the same in the two networks, but
the form of the interdependence of bank returns differs. In the clustered network, banks in thesame cluster have perfectly positively dependent returns, while those in different clusters have
independent returns; in the unclustered network, by contrast, the dependence between a givenbank’s return and that of its neighbors is strongly positive (but imperfect), that between its own
return and those of its neighbors’ neighbors is weakly positive, and its return is independent ofthat of the remaining bank. Suppose a bank defaults (solvency status=0) if its return is less thanor equal to some level d ∈ [L, H), otherwise it is solvent (solvency status=1). Let banks’ solvency
statuses in the clustered network be described by (Y1 , . . . , Y6 ) ∈ {0, 1}6 , so Yi = I{Yi0 >d} , and in the
unclustered network by (X1 , . . . , X6 ) ∈ {0, 1}6 , so Xi = I{Xi0 >d} .
We compare systemic risk in the two networks by using the symmetric supermodular orderingto compare the interdependence of the random vectors (Y1 , . . . , Y6 ) and (X1 , . . . , X6 ). Supermodularity of the “systemic cost function” C(x1 , . . . , x6 ) reflects the judgment that the additional costto the system from two bank defaults is higher than the sum of the marginal costs from each individual default, and symmetry reflects the fact that the banks in this setting are of equal size.3334
Proposition 5 can be applied to show the following result:
32

Compared to our model, Allen et al (2012) restrict attention to the case where projects are equally likely to

succeed and fail and where a bank defaults if and only if all three of the projects in its portfolio fail. Their model
involves additional features, such as different maturities of debt, through which interdependence of banks’ returns
indirectly influences welfare.
33
By using a symmetric supermodular function for comparisons of expected systemic cost, we are comparing the“average” degree of interdependence across the whole set of banks.
34
Since the marginal distribution of each bank’s return, and hence of each bank’s solvency status, is the sameacross the two networks, it is irrelevant whether or not we specifically restrict C(x1 , . . . , x6 ) to be decreasing: whencomparing multivariate distributions with identical marginals, the decreasing (symmetric) supermodular ordering isequivalent to the (symmetric) supermodular ordering. See the remark following Theorem 2.

27

Proposition 8 For any probability of project success p and for any common failure threshold d forbanks, (Y1 , . . . , Y6 ) SSP M (X1 , . . . , X6 ). Hence for any supermodular and symmetric systemic costfunction, expected systemic cost is higher under the clustered than under the unclustered network.
The joint distributions of solvency statuses compared in Proposition 8, which have support{0, 1}6 , are the coarsened (and translated) versions of the joint distributions of the actual bankL+2H
6
returns, which have support {L, 2L+H
3 ,3 , H} . Proposition 5 can also be applied to examine

whether the distributions of actual (uncoarsened) returns under the clustered and unclusterednetworks can be ranked according to SSP M . We can show that this stronger result does not hold,L+2H
6
by constructing a symmetric supermodular systemic cost function defined on {L, 2L+H
3 ,3 , H}

whose expectation is strictly higher under the unclustered network than under the clustered one.

5.4

Other Applications

Multidimensional Deprivation
The supermodular ordering is a useful tool for making comparisons of deprivation given dataon multiple attributes, such as income, health, and education.35 To compare multidimensional
deprivation between two datasets (e.g., two countries, two time periods), one popular strategy is toaggregate across attributes to generate a deprivation measure for each individual and then sum thesemeasures to obtain an aggregate deprivation measure for the whole dataset. Importantly, under thisstrategy, comparisons of deprivation depend upon i) whether the different dimensions are regarded
as complements or substitutes in the individual deprivation function and ii) the interdependence
in the joint distributions of attributes in the two datasets.
According to the intersection approach, an individual is deemed “multidimensionally deprived”
if, for each attribute i, his achievement xi falls below some threshold zi (see Alkire and Foster(2011) and Atkinson (2003)). This approach implies an individual deprivation function of the formd(x1 , . . . , xn ) = I{xi ≤zi ∀i} , which is supermodular, since it is a lower-orthant indicator function.
Therefore, if one multidimensional distribution of achievements dominates another according to thesupermodular ordering, the aggregate level of deprivation obtained by summing this deprivation
measure over individuals is higher for the former distribution than for the latter, regardless of thethresholds. By contrast, the union approach classifies an individual as deprived if and only if there
35

See Atkinson and Bourguignon, 1982, the Symposium in Honor of Amartya Sen in the Journal of Public Eco-nomics, Vol. 95, 2011, and the Symposium on Inequality and Risk in the Journal of Economic Theory, Vol. 147,
2012.

28

is at least one dimension i in which xi ≤ zi . The deprivation function is now submodular36 and leads
to the opposite result: higher interdependence in the multidimensional distribution of achievementlevels, in the sense of the supermodular ordering, implies lower aggregate deprivation.
In the intersection approach, there is a complementarity among the different dimensions in thedetermination of individual deprivation. A natural generalization, which retains this complementarity, would make individual deprivation an increasing convex function of the number of dimensions
in which xi falls below the threshold zi :d(x1 , . . . , xn ) = φnX!
I{xi ≤zi }

,

(13)

i=1

where φ is increasing and convex. Similarly, a natural generalization of the union approach, which
retains the substitutability among the different dimensions, would express individual deprivation in
the form (13) where φ is increasing and concave. Our analysis easily extends to these deprivation
functions.37
Prediction and Parameter Estimation
Consider the problem of making a prediction θ̃ about the value of an unknown parameter θ, tominimize the value of a loss function L(θ̃ − θ) that is convex and minimized at 0. The prediction
is based on some data (X1 , . . . Xn ), where Xi has distribution Fi (·|θ), conditional on θ. We focus,
for this illustration, on the case in which the estimator θ̃ is an affine function of the observedPvariables:38 θ̃ = κi Xi for some nonnegative weights {κi }i=1,...,n .
The supermodular ordering can be used to compare the richness of various datasets, holding
fixed the marginal distributions Fi (·|θ). Intuitively, a dataset is richer if it comes from independentsources instead of closely related ones. Formally, let the datasets (X1 , . . . , Xn ) and (Y1 , . . . , Yn )be generated by joint distributions F (·|θ) and G(·|θ), respectively, and suppose that F (·|θ) ≺SP M
P
G(·|θ) for all θ. Then, since L( i κi xi − θ) is supermodular in (x1 , . . . , xn ) for all θ, we have that36

The individual deprivation measure is d(x1 , . . . , xn ) = 1 − I{xi ≥zi ∀i} , which is a submodular function of(x1 , . . . , xn ), since the supermodular upper-orthant indicator function appears with a negative sign.
37
In either case, we can regard the binary variables x0i ≡ I{xi ≤zi } as coarsened versions of the original data. For
φ convex (concave), the deprivation function in (13) is a symmetric supermodular (symmetric submodular) functionof (x01 , . . . , x0n ). Therefore, for a given vector of thresholds (z1 , . . . , zn ), aggregate deprivation will be lower in one
population than another, for all deprivation measures in the class in (13) with φ convex (concave), if and only
if the distribution of (x01 , . . . , x0n ) in one population is more (less) interdependent, in the sense of the symmetricsupermodular ordering, than in the other. Proposition 5 then shows that in this context, symmetric supermodularPPn0
dominance is equivalent to univariate convex dominance for distributions of ni=1 xi =i=1 I{xi ≤zi } .
38
While special, affine estimators are pervasive in statistics and econometrics. If, for example, (X1 , . . . , Xn ) areexchangeable and have mean θ, then θ̃ will be the sample average of those variables.

29

P
P
E F [L( κi Xi − θ)|θ] ≤ E G [L( κi Yi − θ)|θ] for all nonnegative {κi }, for all convex L, and for all θ.
That is, for a given affine estimator θ̃, the dataset (X1 , . . . , Xn ) in which the observations are richer,in the sense of being less supermodularly dependent, generates a better prediction of the unknown
parameter. From this it follows that the less supermodularly dependent dataset also generates a
better prediction when the weights {κi } can be chosen optimally according to the dataset.
Matching
The supermodular ordering is well suited for comparing the efficiency of two-sided or many-sided
matching mechanisms when the outcomes of the matching process are subject to frictions. Withproduction functions that are supermodular in the qualities of the different components of a match,
efficient matching is perfectly assortative, corresponding to a perfectly positively dependent joint
distribution of the random variables representing the qualities of each component. In the presence ofnoisy information, costly search, or credit constraints, perfectly assortative matching will generally
not arise. In these settings, Theorem 1 and the constructive methods of Section 2.1 can be used
to assess when one matching mechanism will generate higher expected surplus than another, forall supermodular production functions. While applications to two-sided matching problems havereceived some attention,39 multi-dimensional applications remain largely unexplored.40
Decision Making
The application to committee decisions illustrated the relationship between increased interdependence and the comparative statics of decisions, showing how greater alignment in agents’preferences, as captured by supermodular dominance of the distribution of agents’ payoffs, affectedcommittee search and voting behavior. As another example, Gollier (2011) applies the supermodular ordering in the bivariate case to study how the efficient discount rate in an extendedRamsey-type model depends on the interdependence between initial consumption and the growthrate of consumption. A more systematic exploration of the role of the supermodular ordering in thecomparative statics analysis of decisions should be a particularly fruitful area for future research.
39

Fernandez and Gali (1999) use the known bivariate characterization of the supermodular ordering (Levy andParoush, 1974) to compare the efficiency losses from markets and tournaments as allocative mechanisms in an economy
with borrowing constraints. Meyer and Zeng (2013) employ the ordering to compare assignment mechanisms when
qualities are ex ante uncertain and different mechanisms generate and use different information. Chade and Eeckhout(2013) study positive and negative sorting in a related environment.
40
One exception is Prat (2002), but he compares only a perfectly positively dependent joint distribution with anindependent one.

30

6

Discussion

6.1

Continuous Support

The supermodular ordering on a continuous support can be characterized in terms of all its discretecoarsenings. For F, G with continuous densities on L = ×i [ai , bi ], define the supermodular orderingon L as follows: F ≺CSP M G if and only if E[w|F ] ≤ E[w|G] for all integrable supermodular
functions on L.
A finite coarsening L̃ of L is defined by a finite partitioning L̃i of each Li . The coarsened versionof F on L̃ is the distribution F̃ such that for all x̃ ∈ L̃, F̃ (x̃) is the probability that F puts on theon the cell (hyperrectangle) defined by the Cartesian product of the x̃i ’s: F̃ (x̃) = F (×i x̃i ). For
any function w on L, the coarsened version w̃ of w on L̃ is the average of w over the hyperrectangle
defined by each ×i x̃i . Formally,Rw̃(x̃) =×i x̃i w(x)dxR×i x̃i dx.

(14)

In light of the robustness to coarsening of the ordering ≺SP M noted in Section 2, it is not surprisingthat the supermodular ordering on L is stronger than the supermodular ordering on every finite
coarsening of L. With continuous densities, the following equivalence result holds.
Theorem 5 Suppose that distributions F and G have continuous densities. F ≺CSP M G if andonly if F̃ ≺SP M G̃ on all finite coarsenings L̃ of L.

6.2

CopulasA useful approach to examining the interdependence of random variables, which is widespreadin econometrics and finance and gaining prominence in the study of intergenerational mobility
and income dynamics, is based on the concept of a copula.41 Given any distribution function F ofn variables, with marginal distributions F1 , . . . , Fn , Sklar’s theorem (1959) guarantees the existenceof a function C : [0, 1]n → [0, 1] such that
F (x1 , . . . , xn ) = C(F1 (x1 ), . . . , Fn (xn )).
41

(15)

Copulas are used in statistics and econometrics to model the intertemporal dependence of time series (see forexample Joe (1997, Ch. 8), and Beare (2010)). For applications in risk management and derivative pricing, see
Embrechts (2009) and Li (2000). Bonhomme and Robin (2006) use copulas to model individual earnings trajectories,
and Chetty et al (2014) use them to examine intergenerational mobility.

31

C is called the copula of F . With discrete support, the values of the copula are pinned down on
the domain L̃ ≡ {(F1 (x1 ), . . . , Fn (xn )) : (x1 , . . . , xn ) ∈ L}. The copula of a discrete distribution istherefore essentially unique.
Since Xi ∼ Fi implies that Fi (Xi ) ∼ U [0, 1], the copula is a distribution function each of whose
marginal distributions is uniform on [0, 1]. By normalizing marginal distributions to be uniform,
copulas allow an exclusive focus on interdependence. Nevertheless, there remains the need tofind an appropriate way of comparing copulas. The supermodular ordering, since it is based oncomplementarities in objective functions, provides an economically meaningful way to compareinterdependence in copulas.
Proposition 9 F ≺SP M G on L if and only if F and G have identical marginals and their copulas
satisfy CF ≺SP M CG on L̃.
Several works have examined whether copulas within specific parametric families with continuous supports can be ranked according to the supermodular ordering.42 In contrast, the methods wehave developed in this paper for characterizing and applying the supermodular ordering allow nonparametric comparisons of copulas. This feature makes our methods useful for comparing empiricalcopulas, as well as theoretical ones.43

42

Positive results have been obtained for Archimedean copulas and asymmetric extensions thereof by Wei and

Hu (2002) and for Gaussian, Student t, Clayton, and Marshall-Olkin families of copulas by Burtschell et al (2009).
43
Chetty et al (2014) decompose the joint distribution of parent and child income into the copula and the marginal
distributions; this approach allows them to disentangle changes over time in relative mobility from changes in inequality. They coarsen the empirical copula by aggregating parent and child incomes into quintiles.

32Appendix
A

Proofs for Section 2

Proof of Theorem 1 Supermodular functions are characterized by the property (Topkis, 1978) thatw∈S⇐⇒w(x + ei + ej ) + w(x) ≥ w(x + ei ) + w(x + ej )(16)

for all i 6= j and x ∈ L such that x + ei + ej ∈ L. Equivalently,
w∈S

⇐⇒

w·t≥0

∀t ∈ T .

(17)

Equation (3) holds if and only if g − f belongs to the convex cone C(T ) generated by T , defined by C(T ) =P{ t∈T αt t : αt ≥ 0 ∀t ∈ T }. From (17), S is the dual cone of C(T ). Since C(T ) is closed and convex, this
implies (Luenberger, 1969, p. 215) that C(T ) is the dual cone of S:δ ∈ C(T )⇐⇒w·δ ≥0∀w ∈ S.

Therefore, f ≺SP M g if and only if g − f ∈ C(T ).



Proof of Proposition 1 Suppose that the hypotheses hold but that f 6= g. Then Theorem 1 implies that atleast one αt in (3) must be strictly positive. Let tzij denote a t ∈ T such that αt > 0. For the supermodular
function w(x) = xi xj , the inequality in (16) is strict for all x, so w · tzij > 0 and thus w · g > w · f .
Therefore E(Yi Yj ) > E(Xi Xj ), and since any t ∈ T leaves marginal distributions unchanged, it follows that
Cov(Yi , Yj ) > Cov(Xi , Xj ), yielding a contradiction.
Proof of Proposition 2 Without loss of generality, we prove the claim for the case where Li = {0, 1, . . . , mi −1} (other cases are treated with an obvious modification of the function w below). Consider a point x ∈ L
x−e −eand a pair of dimensions i, j such that the elementary transformation t∗ ≡ ti,j i j is well-defined. Suppose
that, contrary to the claim, there exist nonnegative coefficients αs such that
X
t∗ =
αs s.
(18)
s∈T \{t∗ }PPDefine the function w on L by w(x) = ( 43 )2 k xk and, for y 6= x, w(y) = 2 k yk . It is easy to check thatw is supermodular. Moreover, w makes a strictly positive scalar product with all t ∈ T except for those ofx−ek −elthe form tk,lfor some dimensions k, l. Since t∗ is one of the elementary transformations of this form,taking the scalar product of w with both sides of (18) yieldsX0=αs (w · s).
s∈T \{t∗ }This equation in turn implies that αs = 0 for all transformations s ∈ T \ {t∗ } except possibly those of thek −elform tx−e
for some k, l. However, t∗ cannot be a positive linear combination of only transformationsk,lx−ek −elof this form. To see this, observe that any s 6= t∗ of the form tk,lfor some k, l must take value 0 at∗
x − ei − ej , whereas t evaluated at x − ei − ej equals 1.
Constructive proof of Theorem 1 for bivariate distributions
For bivariate distributions f and g, we will prove that f ≺SP M g implies the existence of a unique setPof nonnegative coefficients {αt }t∈T such that g − f = t∈T αt t, and we identify each αt .

33

Since for each i ∈ N and each ki ∈ Li , the functions w(z) = I{zi ≥ki } and w(z) = I{zi ≤ki } are supermodular, f ≺SP M g implies that f and g have identical marginals. Given our narrow definition of elementarytransformations in (2), for bivariate f and g with identical marginals, there is a unique representation ofP
g − f as t∈T αt t, where the weights αt can have arbitrary signs. To see this, note that if L has m1 × m2
elements, then g − f is fully described by its values at (m1 − 1) × (m2 − 1) points, and there are exactly(m1 − 1) × (m2 − 1) linearly independent elementary transformations. Let L− denote the (m1 − 1) × (m2 − 1)points v ∈ L such that v + e1 + e2 ∈ L. Indexing the elementary transformations in T by the points in L− ,Pwrite the unique representation of g − f as x∈L− αx tx . We now identify each αx and show that αx ≥ 0.
For v ∈ L− , define Iv as the indicator function of the lower-orthant set {z|z ≤ v}. Each such Iv issupermodular. For each v ∈ L− ,X
X
Iv · (g − f ) = Iv · (αx tx ) =αx (Iv · tx ) = αv .
(19)
x∈L−

x∈L−

The third equality in (19) follows since Iv · tv = 1, whereas for all x ∈ L− such that x 6= v, Iv · tx = 0. HenceP
if f ≺SP M g, then g − f = x∈L− αx tx , where for each x ∈ L− , αx = Ix · (g − f ) = G(x) − F (x) ≥ 0.
It is easy to adapt this argument to provide a simple constructive proof, for bivariate distributions,of Theorem 2 for the ordering ≺ISP M . Once again, the construction is greatly simplified by our narrow
definitions of the two types of elementary transformations, corresponding to the two orderings ≺SP M and≺F OSD .
Proof of Proposition 3 There always exists a feasible vector (α, β), namely (α, β) = (0, δ + ). Moreover, theoptimum value of program (4) is nonnegative since the feasibility constraints require that β have nonnegative
components. If f ≺SP M g, there exists α∗ ≥ 0 such that E + α∗ = δ + , so the optimum value of the program
must be zero, since that value is achieved by (α, β) = (α∗ , 0). Reciprocally, if there exists (α∗ , β ∗ ) such thatthe value of the program is zero, then necessarily β ∗ = 0 and E + α∗ = δ + .
Proof of Theorem 2 The equivalence of conditions 2) and 3) follows from Theorem 1, the definition of γ,
and the decomposition result in (6). It is obvious that 2) implies 1). We now show that 1) implies 3). For
any supermodular w, letnXw0 (z) = w(z) −w(zi ei ) + (n − 1)w(0),i=1thwhere zi ei is the vector with i component equal to zi and all other components equal to 0. Clearly,
w0 (zi ei ) = 0 for all i and zi , and therefore, since γ(z) = 0 for all z 6= zi ei for some i and some zi , w0 · γ = 0.
Moreover, w0 is supermodular, since it is the sum of supermodular functions, and w0 is increasing, since forany z ∈ L and i such that z + ei ∈ L, supermodularity of w0 yields
w0 (z + ei ) − w0 (z) ≥ w0 ((zi + 1)ei ) − w0 (zi ei ) = 0.
Letting δ = g − f , g ISP M f implies, therefore, that w0 · δ ≥ 0 and hence, since w0 · γ = 0, we have34

w0 · (δ − γ) ≥ 0. Furthermore,"(w − w0 ) · (δ − γ)=X(δ(z) − γ(z))"=(δ(z) − γ(z))=

w(zi ei ) − (n − 1)w(0)nX!#w(zi ei )

i=1

z∈L

=

!#

i=1

z∈L

X

n
X

n m
i −1
X
X

X

i=1 k=0

z:zi =k!
(δ(z) − γ(z)) w(kei )0,Pwhere the second line follows since z∈L (δ(z) − γ(z)) = 0 and the final equality follows since (8) holds
for all i and all k. Thus, since w0 · (δ − γ) ≥ 0, it follows that w · (δ − γ) ≥ 0, proving the first part ofcondition 3). Finally, taking, for each i ∈ N and k ∈ {1, . . . , mi − 1}, w(z) = I{zi ≥k} , g ISP M f implies
P
P
that z:zi ≥k g(z) ≥ z:zi ≥k f (z), proving the second part of 3).
Proof of Proposition 5 Recall that for L = {0, 1, . . . , m − 1}n , k ∈ {1, . . . , m − 1}, and x ∈ L, c̄k (x) ≡Pn1m−1(x)). Since all permutations of x correspond to the same c̄(x), ai=1 I{xi ≥k} and c̄(x) ≡ (c̄ (x), . . . , c̄function w is symmetric if and only if it can be written as w(x) = φ(c̄(x)), for some φ defined on L̃m−1 , therange of c̄(x). We now show that a function w of this form is supermodular if and only if φ(·) is supermodular
and componentwise convex.44
As stated in (17), a function w is supermodular if and only if w · t ≥ 0 for every elementary transformation txi,j ∈ T , as defined in (2). For L = {0, 1, . . . , m − 1}n , there are two distinct types of elementarytransformation txi,j , those in which for some k ∈ {1, . . . , m − 1}, xi = xj = k − 1, and those in which xi 6= xj .
For w symmetric, w · t ≥ 0 for all t = txi,j such that xi = xj = k − 1 if and only if the corresponding
function φ defined above is componentwise convex with respect to its k th argument, c̄k (x). Moreover, forw symmetric, w · t ≥ 0 for all t = txi,j such that xi = k − 1 and xj = l − 1, k 6= l, if and only if thecorresponding φ is supermodular with respect to c̄k (x) and c̄l (x). Applying these two results for all i, j ∈ N
and all k, l ∈ {1, . . . , m − 1} shows that a symmetric w defined on L is supermodular if and only if thecorrespoding φ defined on L̃m−1 is componentwise convex and supermodular in all its arguments.


B

Incomparability of Mixture Distributions: Example

Let Xi = θ + εi , where θ and {εi }i∈N are all independent, θ equals 2 or -2 with probability p and 1 − p,respectively, and each εi equals 1 or -1 with probability 1 − p and p, respectively. Similarly, let Yi = θ0 + ε0i ,where θ0 and {ε0i }i∈N are all independent, θ0 equals 1 or -1 with probability 1 − p and p, respectively, andeach ε0i equals 2 or -2 with probability p and 1 − p, respectively. X and Y have identical marginals, andthe common shock would seem to be more important relative to the idiosyncratic shock in the distributionof X than in Y . Nevertheless, for any p 6= 21 , the distributions of Y and X cannot be ranked according to
the supermodular ordering. To see this, note that all upper-orthant and lower-orthant indicator functions
are supermodular, and observe that for p > (<) 12 , P (X1 ≥ 3, X2 ≥ 3) < (>) P (Y1 ≥ 3, Y2 ≥ 3) andP (X1 ≤ −3, X2 ≤ −3) > (<) P (Y1 ≤ −3, Y2 ≤ −3).
44

Functions that are both supermodular and componentwise convex have been studied by Marinacci and Montrucchio (2005) and by Müller and Scarsini (2012), where they are termed “ultramodular”.

35References
Acharya, V.V., Pedersen, L.H., Philippon, T., and Richardson, M. (2010) “Measuring Systemic Risk,” N.Y.U.
W.P.
Adrian, T., and Brunnermeier, M.K. (2009) “CoVar,” Fed. Res. Bank of N.Y. Staff Report 348.
Alkire, S., and Foster, J. (2011) “Counting and Multidimensional Poverty Measurement,” J. of Public Economics,
95, 476-87.
Allen, F., Babus, A., and Carletti, E. (2012) “Asset Commonality, Debt Maturity and Systemic Risk,” J. of
Financial Economics, 104, 519-34.
Andreoli, F., and Zoli, C. (2014) “Measuring Dissimilarity,” Working Paper 23, Dept. of Economics, Univ. ofVerona.
Athey, S., and Levin, J. (2001) “The Value of Information in Monotone Decision Problems”, Working Paper,
Stanford University.
Atkinson, A. B., and Bourguignon, F. (1982) “The Comparison of Multi-Dimensioned Distributions of Economic
Status,” Review of Economic Studies, 49, 183-201.
Atkinson, A. B. (2003) “Multidimensional Deprivation: Contrasting Social Welfare and Counting Approaches,” J.
of Economic Inequality, 1, 51-65.
Avis, D., and Fukuda, K. (1982) “A Pivoting Algorithm for Convex Hulls and Vertex Enumeration of Arrangements
and Polyhedra,” Discrete and Computational Geometry, 8, 295–313.
Avis, D., and Bremner, D. (1995) “How Good Are Convex Hull Algorithms?” 11th Annual ACM Symposium on
Computational Geometry, Vancouver, B.C., 20-8.
Baldiga, K., and Green, J.R. (2013) “Assent-Maximizing Social Choice,” Social Choice and Welfare, 40, 439–60.
Beale, N., Rand, D., Battey, H., Croxson, K., May, R., and Nowak, M. (2011) “Individual versus Systemic
Risk and the Regulator’s Dilemma,” Proc. of the National Academy of Sciences, 108, 12647-52.
Beare, B. (2010) “Copulas and Temporal Dependence,” Econometrica, 78, 395–410.
Ben-Porath, E., Gilboa, I., and Schmeidler, D. (1997) “On the Measurement of Inequality under Uncertainty,”
J. of Economic Theory, 75, 194–204.
Bertsimas, D., and Tsitsiklis, J. (1997) Introduction to Linear Optimization, Athena Scientific.
Boland, P., and Proschan, F. (1988) “Multivariate Arrangement Increasing Functions with Applications in Probability and Statistics,” J. Multivariate Analysis, 25, 286–98.
Bond, P., and Gomes, A. (2009) “Multitask Principal-Agent Problems: Optimal Contracts, Fragility, and Effort
Misallocation,” J. of Economic Theory, 144, 175–211.
Bonhomme, S., and Robin, J.-M. 2006 “Modeling Individual Earnings Trajectories Using Copulas: France, 19902002,” Contributions to Economic Analysis, 275, 441-78.
Burtschell, X., Gregory, J., and J.-P. Laurent (2009) “A Comparative Analysis of CDO Pricing Models under
the Factor Copula Framework,” J. of Derivatives, 16, 9-37.
Caillaud, B., and Tirole, J. (2007) “Consensus Building: How to Persuade a Group,” American Economic Review,97, 1877–900.
Chade, H., and Eeckhout, J. (2013) “Stochastic Sorting,” Working paper, Arizona State University and Universityof Pompeu Fabra.
Chetty, R., Hendren, N., Kline, P., Saez, E., and Turner, N. (2014) “Is the United States Still a Land of
Opportunity? Recent Trends in Intergenerational Mobility,” American Econ. Review, 104, 141-47.
Chew, S.H., and Sagi, J. (2012) “An Inequality Measure for Stochastic Allocations,” J. of Economic Theory, 147,
1517-44.

36

Cousin, A., and Laurent, J.-P. (2008) “Comparison Results for Exchangeable Credit Risk Portfolios,” Insurance:
Mathematics and Economics, 42, 1118–27.
Dardanoni, V. (1993) “Measuring Social Mobility,” J. of Economic Theory, 61, 372–394.
Denuit, M., Dhaene, J., Goovaerts, M.J., and Kaas, R. (2005) Actuarial Theory for Dependent Risks: Measures,
Orders, and Models, Wiley.
Dwielwulski, P., and Quah, J. (2014) “Testing for Production with Complementarities,” Oxford Dept. of Economics Disc. Paper 722.
Embrechts, P. (2009) “Copulas: A Personal View,” J. of Risk and Insurance, 76, 639–50.
Epstein. L., and Tanny, S. (1980) “Increasing Generalized Correlation: A Definition and Some Economic Consequences,” Canadian J. of Economics, 13, 6–34.
Fernandez, R., and Gali, J. (1999) “To Each According to...? Markets, Tournaments, and the Matching Problem
with Borrowing Constraints,” Review of Economic Studies, 66, 799–824.
Foerster, A.T., Sarte, P.-D. G., and Watson, M.W. (2011) “Sectoral vs. Aggregate Shocks: A Structural
Factor Analysis of Industrial Production,” J. of Political Economy, 119, 1-38.
Fukuda, K. (2004) “Frequently Asked Questions in Polyhedral Computation”, mimeo, Swiss Federal Institute ofTechnology.
Fukuda, K., and Prodon, A. (1996) “Double Description Method Revisited.” In Combinatorics and Computer
Science, Lecture Notes in Computer Science, 1120, 91–111. Springer.
Gajdos, T., and Maurin, E. (2004) “Unequal Uncertainties and Uncertain Inequalities: An Axiomatic Approach,”
J. of Economic Theory, 116, 3–118.
Gendron-Saulnier, C., and Gordon, S. (2014)“Information Choice and Diversity: The Role of Strategic Complementarities”, Working Paper, Dept. of Economics, Sciences Po.
Genest, C., and Verret, F. (2002) “The T P2 Ordering of Kimeldorf and Sampson has the Normal-Agreeing
Property,” Statistics and Probability Letters, 57, 387-391.
Giovagnoli, A., and Wynn, H.P. (2008) “Stochastic Orderings for Discrete Random Variables,” Statistics andProbability Letters, 78, 28272835.
Gleser, L. (1975) “On the Distribution of the Number of Successes in Independent Trials,” Annals of Probability,
3, 182–8.
Gollier, C. (2011) “Discounting, Inequalities and Economic Convergence,” mimeo, Toulouse School of Economics.
Goldman, A. J., and Tucker, A. W. “Polyhedral Convex Cones”. In Linear inequalities and related systems, Ann.
of Mathematics Studies 38, eds. H. W. Kuhn and A. W. Tucker. Princeton Univ. Press, 19–39.
Grant, S., Kajii, A., Polak, B., and Safra, Z. (2012) “Equally-Distributed Equivalent Utility, Ex Post Egalitarianism and Utilitarianism,” J. of Economic Theory, 147, 1545–1571.
Hardy, G.H., Littlewood, J.E., and Polya, G. (1952) Inequalities, Cambridge: Cambridge University Press,
2nd edition (1st edition 1934).
Hennessy, D. A., and Lapan, H. E. (2003) “A Definition of ‘More Systematic Risk’ with Some Welfare Implications,” Economica, 70, 493–507.
Hoeffding, W. (1956) “On the Distribution of the Number of Successes in Independent Trials,” Annals of Mathematics and Statistics, 27, 713–21.
Holland, P. W., and Rosenbaum, P. R. (1986) “Conditional Association and Unidimensionality in Monotone
Latent Variable Models,” Annals of Statistics, 14, 1523–43.
Hopkins, E., and Kornienko, T. (2010) “Which Inequality? The Inequality of Endowments versus the Inequalityof Rewards,” Amer. Econ. J.: Microeconomics, 2, 106-37.
Hu, T., and Yang, J. (2004) “Further Developments on Sufficient Conditions for Negative Dependence of Random
Variables,” Statistics and Probability Letters, 66, 369–81.

37

Joag-Dev, F., and Proschan, F. (1983) “Negative Association of Random Variables, with Applications,” Annalsof Statistics, 11, 286-95.
Joe, H. (1990) “Multivariate Concordance,” J. of Multivariate Analysis, 35, 12–30.
Joe, H. (1997) Multivariate Models and Dependence Concepts, Chapman & Hall, London.
Jogdeo, K. (1978) “On a Probability Bound of Marshall and Olkin,” Annals of Statistics, 6, 232–34.
Karlin, S., and Novikoff, A. (1963) “Generalized Convex Inequalities,” Pacific J. of Mathematics, 13, 1251–79.
Levy, H., and Paroush, J. (1974) “Toward Multivariate Efficiency Criteria,” J. of Economic Theory, 7, 129–42.
Li, D. (2000) “On Default Correlation: A Copula Function Approach,” J. of Fixed Income, 9, 43–54.
Luenberger, D. (1969) Vector Space Optimization, Wiley, New York.
Marinacci, M., and Montrucchio, L. (2005) “Ultramodular Functions,” Mathematics of Operations Research,
30, 311–332.
Meyer, M.A. (1990) “Interdependence in Multivariate Distributions: Stochastic Dominance Theorems and an Application to the Measurement of Ex Post Inequality under Uncertainty,” Nuffield College D. P. No. 49.
Meyer, M. A., and Mookherjee, D. (1987) “Incentives, Compensation and Social Welfare,” Review of Economic
Studies, 45, 209–26.
Meyer, M.A., and Strulovici, B. (2012) “Increasing Interdependence of Multivariate Distributions,” J. of Economic Theory, 147, 1460–89.
Meyer, M.A., and Zeng, Q.C. (2013) “Matching with Informational Frictions,” draft, Nuffield College, Oxford.
Milgrom, P., and Roberts, J. (1990) “The Economics of Modern Manufacturing: Technology, Strategy, andOrganization,” American Economic Review, 80, 511–528
Milgrom, P., and Roberts, J. (1995) “Complementarities and Fit Strategy, Structure, and Organizational Change
in Manufacturing,” Journal of Accounting and Economics, 19, 179–208.
Moldovanu, B., and Shi, X. (2013) “Specialization and Partisanship in Committee Search,” Theoretical Economics,
8, 751-774.
Motzkin, T., Raiffa, H., Thompson, G., and Thrall, R. (1953) “The Double Description Method”. In H. W.
Kuhn and A. W. Tucker eds., Contributions to the Theory of Games II, 51-73.
Müller, A. (2013) “Duality Theory and Transfers for Stochastic Order Relations”. In H. Li and X. Li eds., Stochastic Orders in Reliability and Risk, Springer, 41-57.
Müller, A., and Scarsini, M. (2000) “Some Remarks on the Supermodular Order,” J. of Multivariate Analysis,
73, 107-19.
Müller, A., and Scarsini, M. (2012) “Fear of Loss, Inframodularity, and Transfers,” J. of Economic Theory, 147,
1490-500.
Müller, A., and Stoyan, D. (2002) Comparison Methods for Stochastic Models and Risks, Wiley.
Myatt, D., and Wallace, C. (2012) “Endogenous Information Acquisition in Coordination Games,” Review of
Economic Studies, 79, 340-74.
Patton, A. (2009) “Are ‘Market Neutral’ Hedge Funds Really Market Neutral?,” Review of Financial Studies, 22,2495–530.
Prat, A. (2002) “Should a Team Be Homogenous?,” European Economic Review, 46, 1187–1207.
Promislow, S.D., and Young, V.R. (2005) “Supermodular Functions on Finite Lattices,” Order, 22, 389413.
Puccetti, G., and Rüschendorf, L. (2015) “Computation of Sharp Bounds on the Expected Value of a Supermodular Function of Risks with Given Marginals,” Communications in Statistics - Simulation and Computation, 44,705-718.
Rothschild, M., and Stiglitz, J. E. (1970) “Increasing Risk: I. A Definition,” J. of Economic Theory, 2, 225–43.

38

Rüschendorf, L. (1980) “Inequalities for the expectation of ∆-monotone functions,” Zeitschrift für Wahrscheinlichkeitstheorie und Verwandte Gebiete, 54, 341–349.
Rüschendorf, L. (1983) “Solution of a statistical optimization problem by rearrangement methods,” Metrika, 30,
55–61.
Rüschendorf, L. (2004) “Comparison of multivariate risks and positive dependence,” Journal of Applied Probability,
41, 391–406.
Shaked, M., and Shanthikumar, J.G. (1997) “Supermodular Stochastic Orders and Positive Dependence of Random Vectors,” J. of Multivariate Analysis, 61, 86–101.
Sklar, A. (1959) “Fonctions de Répartition à n Dimensions et Leurs Marges,” Publication de l’Institut de Statistiquede l’Université de Paris, 8, 229-31.
Tchen, A.H. (1980) “Inequalities for Distributions with Given Marginals,” Annals of Probability, 8, 814-27.
Topkis, D.M. (1968) Ordered Optimal Solution, Doctoral Dissertation, Stanford University.
Topkis, D.M. (1978) “Minimizing a Submodular Function on a Lattice,” Operations Research, 26, 5-31.
Torrisi, F., and Baotic, M. (2005) “CDDMEX - Matlab Interface for the CDD Solver.” Available at
http://control.ee.ethz.ch/hybrid/cdd.php.
Wei, G., and Hu, T. (2002) “Supermodular Dependence Orderings on a Class of Multivariate Copulas,” Statistics
and Probability Letters, 57, 375–85.
Ziegler, G. (1997) Lectures on polytopes, Springer-Verlag.

39Online Appendix
C

Proof of Theorem 3

Suppose first that X and Y have symmetric mixture distributions: A(r) and B(r) have dimension q × m
and do not depend on r. Denote by Ā (resp. B̄) the common cumulative-sum matrix generating the Xr ’s(resp. the Yr ’s). Then we seek to show that for all supermodular w,
Ew(X1 , . . . , Xn ) =

q
q
1X
1X
E[w(X1 , . . . , Xn )|Āi,• ) ≥E[w(Y1 , . . . , Yn )|B̄i,• ) = Ew(Y1 , . . . , Yn ),
q i=1
q i=1

(20)

where Āi,• (resp. B̄i,• ) denotes the ith row of Ā (resp. B̄).
Let p̄ ≡ (p̄1 , . . . , p̄m ) denote an arbitrary upper-cumulative vector corresponding to a discrete distribution
on support {1, . . . , m}. We have p̄1 = 1 and p̄k−1 ≥ p̄k for all k. For any supermodular function w on Rn ,define w̄(p̄) byw̄(p̄) = E[w(X1 , X2 , . . . , Xn )|p̄].
Using this definition, (20) can be rewritten as
q
q
1X
1X
w̄(Āi,• ) ≥w̄(B̄i,• ) = Ew(Y1 , . . . , Yn ).
Ew(X1 , . . . , Xn ) =
q i=1
q i=1

(21)

The function w̄ is defined on a convex lattice of Rm and inherits several properties from the supermodularityof w, as shown in the next lemma.45 A function h(x1 , . . . , xj , . . . , xm ) is componentwise convex if, when
considered as a function of just xj , it is convex for each j, for all values of the other m − 1 arguments.
Lemma 1 If w is supermodular, w̄ is supermodular and componentwise convex.
Proof. Changing any component p̄k of p̄ affects all of the Xi ’s and hence has a complicated effect on w̄. It
is useful to consider, as an intermediate step, a setting where each of the independent variables Xi has its
own upper-cumulative distribution vector p̄i , so p̄ir = P (Xi ≥ r), r ∈ {1, . . . , m}. Defineŵ(p̄1 , . . . , p̄n ) = E[w(X1 , . . . , Xn )|p̄1 , . . . , p̄n ].

(22)

Lemma 2 For any supermodular w, ŵ(p̄1 , . . . , p̄n ) has the following properties:∂ 2 ŵ
= 0 for all i ∈ N and r, s ∈ {1, . . . , m},∂ p̄ir ∂ p̄is
∂ 2 ŵ
∂ p̄ir ∂ p̄js

≥ 0 for all i 6= j ∈ N and r, s ∈ {1, . . . , m}.

Proof. The first part of the lemma is standard, and comes from the linearity of the objective with respect
to the probability distribution, which holds also in terms of the cumulative distribution vector. The second
part comes from supermodularity of w. As is easily checked, we have,46 we have∂ ŵ= E[w(X−i , r) − w(X−i , r − 1)],
∂ p̄ir45

The domain of w̄ is a simplex and is clearly convex. Moreover, the inequalities p̄1 ≥ p̄2 ≥ · · · p̄m reduce topairwise inequalities of the form p̄i ≥ p̄j , and define a lattice, as is well known (Topkis, 1968, 1978).
46
Changing p̄ir , keeping pis constant for s 6= r, only affects the marginal probabilities of Xi being equal to r andr − 1, increasing the former and decreasing the latter in equal proportions.

40

and, applying the same transformation to the (difference) function w(x−i , r) − w(x−i , r − 1),∂ 2 ŵ
∂ p̄ir ∂ p̄js

= E[w(X−(i,j) , r, s) + w(X−(i,j) , r − 1, s − 1) − w(X−(i,j) , r − 1, s) − w(X−(i,j) , r, s − 1)],

which is nonnegative, by supermodularity of w.

To conclude the proof of Lemma 1, observe that w̄(p̄) = ŵ(p̄, . . . , p̄). Second-order derivatives of w̄
involve only second-order derivatives of ŵ. Lemma 2 then yields the result.

Now suppose that the aggregate shock takes only two possible values, so both the matrices Ā and B̄
have only two rows (q = 2). The following lemma shows how Lemma 1, in conjunction with stochastic
ordering of A and A CCM B, ensures that (21) holds. With q = 2, condition i) in Lemma 3 implies that
A is stochastically ordered, and conditions ii) and iii) are equivalent to A CCM B. (For all row-stochastic
matrices, the first column of the corresponding cumulative-sum matrix has all entries equal to 1.)
Lemma 3 Suppose that q = 2 and that there exists a nonnegative vector ε such that for all k ∈ {2, . . . , m},i) Ā2,k ≥ Ā1,k + εk ; ii) B̄1,k = Ā1,k + εk ; and iii) B̄2,k = Ā2,k − εk . Then (X1 , . . . , Xn ) SP M (Y1 , . . . , Yn ).
Proof. The function w̄ is polynomial in p̄ and hence twice differentiable. Moreover, by Lemma 1, it is supermodular and componentwise convex, which implies that all of its second-order derivatives are everywhere
nonnegative on its domain. Letting p̄ (resp. π̄) denote the first (resp. second) row of Ā, we need to showthat for any m-vectors p̄, π̄, and ε ≥ 0 such that p̄ + ε ≤ π̄ and ε1 = 0, the following inequality holds:w̄(p̄) + w̄(π̄) ≥ w̄(p̄ + ε) + w̄(π̄ − ε).

(23)

Equivalently, we need to show thatw̄(p̄ + ε) − w̄(p̄) =Z 1X
mw̄k (p̄ + αε)εk dα ≤

0 k=2

Z 1X
m

w̄k (π̄ − ε + αε)εk dα = w̄(π̄) − w̄(π̄ − ε),0 k=2where w̄k denotes the k th partial derivative of w̄. Let δ = π̄ − ε − p̄ ≥ 0. For each k ∈ {2, . . . , m},w̄k (π̄ − ε + αε) − w̄k (p̄ + αε) =

Z 1X
m
0

w̄kk̃ (p̄ + αε + βδ)δk̃ dβ ≥ 0,

(24)

k̃=2

where the inequality holds since, by Lemma 1, all second-order derivatives of w̄ are nonnegative. Summingthese inequalities over k from 2 to m and integrating with respect to α from 0 to 1 then yields the result.
Starting from the stochastically ordered matrix Ā, the matrix B̄ described in Lemma 3 is obtained by asimple transformation that shifts a small amount of weight from the stochastically dominant row (row 2) tothe dominated row (row 1), in (possibly) every column except the first. Such a transformation clearly makes
the rows of the cumulative-sum matrix more similar, while keeping the column sums fixed, thus reducing theimportance of the aggregate shock while leaving the unconditional distribution of each variable unchanged.
To complete the proof, we show that given any A and B such that A is stochastically ordered andA CCM B, Ā can be converted into B̄ through a sequence of simple transformations of the form inLemma 3, affecting only two of the q rows. We first prove the claim when B is stochastically ordered (Step1) and then extend the argument to the general case (Step 2). From (20), the unconditional expectation of
any objective function w is the average of the q possible expected values of w, conditional on the realizationof the aggregate shock, i.e., the average of the q possible values of w̄, as in (21). Therefore, given Lemma 1,

41

for any supermodular w, each simple transformation in the sequence reduces the average value of w̄ andhence reduces the expected value of w.
Since Ā and B̄ are the cumulative-sum equivalents of the q × m row-stochastic matrices A and B, Āi,kand B̄i,k lie in [0, 1] and are weakly decreasing in k. Moreover, for any cumulative-sum matrix, the firstcolumn has all entries equal to 1, so we will henceforth ignore the first column of all such matrices. A
stochastically ordered means that Āi,k is weakly increasing in i. A CCM B means that for each k, thecolumn vector Ā•,k majorizes the column vector B̄•,k . Below, we sometimes abuse notation slightly and use
the expression Ā CCM B̄ to mean the same thing as A CCM B.

C.1

Step 1: Analysis when B is stochastically ordered

When B is stochastically ordered, B̄i,k is weakly increasing in i. We first consider the case in which B̄ hasstrictly monotonic entries across row and column indices (ignoring, as noted, above, the first column), soχ = min{B̄i+1,k − B̄i,k , B̄i,k − B̄i,k+1 } > 0.
i,kThe case where B̄ has strictly monotonic entries
The proof consists in building, by induction on k, a sequence of matrices whose first k columns are
identical to those of B̄ and such that the mixture distributions generated from them are dominated by thatgenerated from Ā according to the supermodular ordering. Let k denote the smallest column index suchthat the k th columns Ā•,k and B̄•,k of Ā and B̄ are distinct.
Lemma 4 There exists a stochastically ordered cumulative-probability matrix C such that i) C•,k̃ = B̄•,k̃
for all k̃ ≤ k; ii) for all k, C•,k majorizes B̄•,k ; and iii) the mixture distribution corresponding to C is
SPM-dominated by that corresponding to Ā.
Proof. Let C solve the optimization problem
inf
E

X
i≥2



X

Ej,k 

(25)

j≥i

subject to the following constraints:
1. Ei,k ∈ [0, 1] for all i, k;
2. E satisfies row monotonicity (the entries in each row of E are decreasing in the column index);
3. E is stochastically ordered (the entries of E are increasing in the row index);
4. E dominates B̄ according to the cumulative column criterion (i.e., each column of E majorizes thecorresponding column of B̄);
5. the mixture distribution corresponding to E is SPM-dominated by that corresponding to Ā;
6. E•,k̃ = B̄•,k̃ for all k̃ < k.
The set of E’s satisfying these constraints is compact (as a closed, bounded subset of a finite dimensional
space) and nonempty (since Ā belongs to it), and the objective (25) is continuous. Therefore, its minimum
is reached by some C.

42

We will show that C•,k is equal to B̄•,k , which will prove the lemma. Suppose, by contradiction, thatC•,k 6= B̄•,k . Since C•,k majorizes B̄•,k and C•,k 6= B̄•,k , there must exist a row i such that47
Ci,k ≤ B̄i,kand

Ci+1,k > B̄i+1,k .

(26)

We will show that it is possible to increase Ci,k by a small amount ε, and decrease Ci+1,k by the sameamount and modify some other entries, in such a way that the resulting matrix D satisfies all the constraintsof the minimization problem (25). Such change only affects the i + 1 partial sum of (25), and decreases itby an amount ε, which will yield the desired contradiction.
Let k̄ denote the largest column index such that Ci+1,k̃ = Ci+1,k for all k̃ ∈ [k, k̄],48 and let D denotethe matrix identical to C for all rows other than i and i + 1 and for all columns outside of [k, k̄], and suchthat
1. Di,k̃ = Ci,k̃ + ε
2. Di+1,k̃ = Ci+1,k̃ − ε = Ci+1,k − εfor all k̃ ∈ [k, k̄], for some small positive constant ε that we will determine later.
We first check D is row-monotonic for ε small enough. First, D inherits this property from C for all
rows other than i and i + 1. For row i, we need to check that adding ε to Ci,k does not raise it above
Ci,k−1 (if k = 1, there is nothing to check). This comes from the fact that Ci,k ≤ Ci,k−1 − χ, sinceCi,k ≤ B̄i,k ≤ B̄i,k−1 − χ = Ci,k−1 − χ. For i + 1, we must check that reducing Ci,k̄ by some small amount
does not take it below Ci,k̄+1 . This comes from the definition of k̄.49
Second, we check that D is stochastically ordered. This is clearly true for all columns outside of [k, k̄],where D inherits this property from C. For columns k̃ ∈ [k, k̄], we use that Ci,k + ε ≤ Ci+1,k − ε for allε ≤ χ/2,50 which yields the inequalities
Di,k̃ ≤ Di,k = Ci,k + ε ≤ Ci+1,k − ε = Di+1,k̃ .
We now show that the columns of D majorize those of B̄. It suffices to check that
X
X
Dj,k̃ ≥
B̄j,k̃
j≥i+1

(27)

j≥i+1

for all k̃ ∈ [k, k̄]. All other majorization inequalities hold trivially since D has the same relevant partial sums
as C for columns outside of [k, k̄] and for row indices other than i + 1. By construction, we have
X
X
X
Dj,k̃ =
Cj,k̃ ≥
B̄j,k̃
(28)
j≥i+2

j≥i+2

j≥i+2

For k̃ > k, we have
Di+1,k̃ = Ci+1,k − ε ≥ B̄i+1,k − ε ≥ B̄i+1,k̃
47PPThe set I(k) = {i : j≥i Cj,k > j≥i B̄j,k } is nonempty. Let ī = max I(k). It suffices to take i = max{j < ī :Cj,k ≤ B̄j,k }.
48
Possibly, k̄ is equal to the number of columns of C.
49
If k̄ equals the number of columns of C, we note that, necessarily, Ci+1,k ≥ B̄i,k + χ > 0, so we can indeed
decrease the entries of C’s (i + 1)-row by an amount ε < χ without creating negative entries.
50
Indeed, we have Ci,k ≤ Ci+1,k − χ from both inequalities of (26) and strict monotonicity of B̄.

43

where the last inequality holds for ε ≤ χ. For k̃ = k, we have, for ε < Ci+1,k − B̄i+1,k (which is strictly
positive, by our choice of i, see (26)),
Di+1,k = Ci+1,k − ε ≥ B̄i+1,kCombining this with (28) implies (27).
Finally, because rows i and i + 1 of the matrices C and D satisfy the assumptions of Lemma 3, themixture distribution corresponding to C SPM-dominates that corresponding to D.51 By transitivity, this
implies that the mixture distribution corresponding to Ā SPM-dominates that corresponding to D.
Therefore, D satisfies all of the constraints of the minimization problem above and, compared to C,
improves the objective by ε, thus providing the desired contradiction.

To conclude the proof of Step 1 of Theorem 3, it suffices to apply Lemma 4 iteratively, transforming thefirst column of Ā into that of B̄, then the second, until Ā is entirely converted into B̄.
The case where B̄ is not strictly monotonic
When B̄ is not strictly monotonic, we approximate Ā and B̄ by a sequence of cumulative-sum matrices Ā(N ), B̄(N ) with the following properties: i) Ā(N ), B̄(N ) are strictly monotonic (and, in particular,
stochastically ordered), with minimal increase χN = 1/N , ii) Ā(N ) majorizes B̄(N ), and iii) Ā(N ) and B̄(N )converge, respectively, to Ā and B̄ as N → ∞. The previous analysis shows that the mixture distribution
corresponding to Ā(N ) SPM-dominates that corresponding to B̄(N ) for each N . Taking the limit as N goesto infinity then shows the result.
To show that this approximating sequence exists for N large enough, we scale down the entries of Ā andB̄ by a factor 1 − (q + (m − 1))/N where q × (m − 1) are the matrix dimensions of Ā and B̄,52 and add thematrix E(N ) such that E(N )i,j = N1 (i + (m − j)) to the scaled down matrices to obtain Ā(N ) and B̄(N ).
By construction, and given the hypotheses on Ā and B̄, these matrices are strictly increasing with minimal
increase 1/N and have entries less than 1. Moreover, one may easily check, for each N , each column of Ā(N )still majorizes the corresponding column of B̄(N ), since the scaling and addition operations do not affectthe ranking of those partial sums.

C.2

Step 2: Analysis when B is not stochastically ordered

Let B̄ so denote the stochastically ordered version of B̄, whose k th column consists of the entries of the k thsocolumn of B̄, ordered from the smallest to the largest. B̄ so is also row monotonic. Indeed, B̄i,kis the ith
thsmallest entry in the column B̄•,k . Since B̄ is row monotonic, that entry must be larger than the i smallest
soentry in the column B̄•,k+1 , which is equal to B̄i,k+1. Moreover, majorization comparisons are the samesobetween columns of Ā and B̄ as they were with Ā and B̄. Therefore, Ā dominates B̄ so according to the
cumulative column criterion and, applying the previous analysis to Ā and B̄ so , we conclude that the mixture
distribution corresponding to Ā SPM-dominates that corresponding to B̄ so . It then suffices to show thatthe mixture distribution corresponding to B̄ so SPM-dominates that corresponding to B̄.
We convert B̄ so to B̄ by a sequence of pairwise row transformations, of the form defined in Lemma 3.
To clarify the exposition of the algorithm, for each column of B̄ so , we refer the cardinal values of the51

Lemma 3 concerns matrices with only two rows. However, by construction of the mixture distribution, theobjective is linearly separable in the rows of the cumulative matrix generating the distribution, and gives equal
weight to each row. Therefore, Lemma 3 applies to arbitrarily many rows, as long as only two rows are changed.
52
Recall that we have excluded the first column of ones that may appear in cumulative matrices.

44

ordered entries, in rows 1, 2, . . . , q, by their ordinal values 1, 2, . . . , q, and we use the same cardinal-to-ordinaltransformation to label the entries in each column of B̄.53 Starting from the last row, q, of B̄ so , whose entries
are equal to q after the cardinal-to-ordinal transformation, we will move these ’q’-labeled entries upwards,
gradually, so as to position them as in B̄. We do this by a sequence of entry permutations between rows q
and i, for i starting from q − 1 until i reaches 1. This will be done so that, after the step involving rows q andi, the rows with indices strictly below q remain stochastically ordered, and the q th row continues to be row
monotonic and to stochastically dominate each of the rows with indices strictly below i. This guarantees thatthe application of Lemma 3, at each step, is valid. Each transformation results in a matrix corresponding
to a mixture distribution that is SPM-dominated by the mixture distribution corresponding to the previous
matrix. By transitivity, therefore, the mixture distribution corresponding to B̄ is SPM-dominated by that
corresponding to B̄ so .
Starting with rows q and q − 1, we flip entries of B̄ so for each column j in which B̄q,j 6= q. The result
is that some entries in the last row of the matrix are now equal to q − 1, with the corresponding entries inrow q − 1 equal to q, for exactly those columns where B̄q,j 6= q. As a result, the q and q − 1 rows of B̄ so are
no longer stochastically ordered, but both rows still (stochastically) dominate all rows with indices less thanq − 2. The next step is to flip entries between rows q and q − 2 of the new resulting matrix, for columns inwhich the q th -row entry does not match q th -row entry of B̄. As a result, the q th row now (possibly) contains
entries labeled ‘q − 2’ while row q − 2 row may contain some ‘q − 1’ entries. Notice that, i) rows q, q − 1, andq − 2 still dominate all rows with indices less than q − 3, and ii) row q − 1 dominates row q − 2. Point ii)
holds because row q − 2 inherited a ‘q − 1’ only if row q − 1 inherited a ‘q’ entry. Proceeding systematicallyby decreasing, at each step, the index i of the row whose entries are swapped with those of row q, the result
after these q − 1 steps is that the q th row now has the same entries as the q th row of B̄, and that the firstq − 1 rows of the resulting matrix are still stochastically ordered.
The next stage of the algorithm leaves the new q th row untouched. In q − 2 steps analogous to the q − 1
steps in the first stage, it transforms row q − 1 into row q − 1 of B̄; it does so while preserving at each step
the stochastic ordering of the first q − 2 rows and guaranteeing that row q − 1 dominates rows with which it
has not yet been flipped. Applying this larger algorithmic loop to each row q − 1, q − 2, . . . 2, in decreasingindex order, we eventually transform B̄ so into B̄ through a sequence of steps, each of which generates amatrix corresponding to a mixture distribution that is SPM-dominated by the previous one.
Finally, we must check that each step preserves row monotonicity, that is, the property that entries ineach row are weakly decreasing in the column index. This is necessary because Lemma 3 applies only topairs of rows that satisfy this condition. Consider the first stage of the conversion from B̄ so to B̄, which
consists of a series of pairwise transformations between the q th row of B̄ so and its ith row, for i decreasingfrom q − 1 to 1. Let D(i) denote the matrix that results after the step involving rows q and i, and let
D = D(1) denote the resulting matrix at the end of this entire first stage. The submatrix of D where thelast row has been removed is the stochastically ordered version of the submatrix of B̄ where the last row
has been removed. In particular, the former submatrix satisfies row monotonicity. Moreover, row j of D(i)is identical to row j of D for j ≥ i and j 6= q, and is equal to the j th row of B̄ so for j < i. All rows
j of D(i) with j < q thus satisfy row monotonicity. It remains to show that row q of D(i) also satisfies
sosorow monotonicity. Observe that D(i)q,k is equal to the ith largest entry, B̄i,k, of B̄•,k
if Dq,k is smaller
53

so
For example, if the second column of B̄ has entries B̄1,2 = .3, B̄2,2 = .4, and B̄3,2 = .1, so that B̄1,2
= .1,
so
so
so
so
B̄2,2 = .3, and B̄3,2 = .4, then entries are converted to B̄1,2 = 2, B̄2,2 = 3, and B̄3,2 = 1, so that B̄1,2 = 1, B̄2,2 = 2,soand B̄3,2= 3. If there are ties, the way ties are broken does not matter, as is clear from the algorithm.

45

sothan B̄i,k, and to Dq,k otherwise. Now consider any two consecutive columns k − 1 and k. We must showthat D(i)q,k−1 ≥ D(i)q,k . If D(i)q,k = Dq,k , then we use the fact that Di,k−1 ≥ Dq,k−1 ≥ Dq,k . If, instead,sososoD(i)q,k = B̄i,k, then we use the fact that D(i)q,k−1 ≥ B̄i,k−1≥ B̄i,k. This demonstrates row monotonicityof D(i), for all i ∈ {1, . . . , q − 1} and, hence, the applicability of Lemma 3 for each transformation describedin the algorithm above.

C.3

Extension of the proof to asymmetric distributions

In the general case where the random vectors X and Y have asymmetric mixture distributions, the matrices
A(r) and B(r), of dimension q×mr , vary with r. Now, using the function ŵ(p̄1 , . . . , p̄n ) = E[w(X1 , . . . , Xn )|p̄1 , . . . , p̄n ]defined in (22) in the proof of Lemma 1, we can writeq

Ew(X1 , . . . , Xn )=1Xŵ(Ā(1)i,• , . . . , Ā(n)i,• )q i=1

Ew(Y1 , . . . , Yn )=1Xŵ(B̄(1)i,• , . . . , B̄(n)i,• ),
q i=1

q

(29)

where Ā(r)i,• denotes the ith row of Ā(r) and B̄(r)i,• the ith row of B̄(r).
th
For each r, let B̄(r)sorow of B̄ so (r), the stochastically ordered version of B̄(r). Thei,• denote the iargument proceeds by first transforming Ā(1) into B̄(1)so , in a manner analogous to what we did for thesymmetric case in Step 1. We need to check that Lemma 3 can be applied as in Step 1. To do so, pick two
realizations, i and j, of the aggregate shock, and consider the ith and j th rows of the matrices {Ā(r)}1≤r≤n .
Using notation analogous to that used in inequality (23) in the proof of Lemma 3, and for r ≥ 2 definingp̄(r) = Ā(r)i,• and π̄(r) = Ā(r)j,• , we must check that the following inequality holds:ŵ(p̄, p̄(2), . . . , p̄(n)) + ŵ(π̄, π̄(2), . . . , π̄(n)) ≥ ŵ(p̄ + ε, p̄(2), . . . , p̄(n)) + ŵ(π̄ − ε, π̄(2), . . . , π̄(n)).

(30)

To generalize the argument used to prove Lemma 3, we begin by writingŵ(p̄ + ε, p̄(2), . . . , p̄(n)) − ŵ(p̄, p̄(2), . . . , p̄(n))

=

Z 1X
m1
0 k=2

ŵ(π̄, π̄(2), . . . , π̄(n)) − ŵ(π̄ − ε, π̄(2), . . . , π̄(n))

=

Z 1X
m1
0 k=2

∂ ŵ
(p̄ + αε, p̄(2), . . . , p̄(n))εk dα∂ p̄1k∂ ŵ
(π̄ − ε + αε, π̄(2), . . . , π̄(n))εk dα.
∂ p̄1kNow let δ(1) = π̄ − ε − p̄ and δ(r) = π̄(r) − p̄(r) for r ≥ 2. Analogously to (24) in the proof of Lemma 3 wehave, for each k ∈ {2, . . . , m1 },∂ ŵ
(π̄ − ε + αε, π̄(2), . . . , π̄(n)) −∂ p̄1k=∂ ŵ
(p̄ + αε, p̄(2), . . . , p̄(n))(31)∂ p̄1kZ 1X
mrn X∂ 2 ŵ
(p̄ + αε + βδ(1), βδ(2), . . . , βδ(n))δk̃ (r)dβ∂ p̄1k ∂ p̄rk̃
0 r=1
k̃=2

≥

0,

where the inequality follows from the fact, as established in Lemma 2, that all cross-partial derivatives of ŵ
are nonnegative. Summing (31) over k from 2 to m1 and integrating over α then shows that (30) holds.

46

Inequality (30) in turn ensures that, when we convert Ā(1) into B̄(1)so , in a manner analogous to Step
1 above, for every transformation in the sequence Lemma 3 can be applied. Therefore,qXŵ(Ā(1)i,• , Ā(2)i,• , . . . , Ā(n)i,• ) ≥

q
X

i=1

ŵ(B̄(1)soi,• , Ā(2)i,• , . . . , Ā(n)i,• ).

i=1

Iterating this conversion for r = 2, . . . , n, we get the chain of inequalities
q
X

q
X

ŵ(Ā(1)i,• , Ā(2)i,• , . . . , Ā(n)i,• ) ≥i=1ŵ(B̄(1)soi,• , Ā(2)i,• , . . . , Ā(n)i,• )

i=1
q
X

≥

so
ŵ(B̄(1)soi,• , B̄(2)i,• , . . . , Ā(n)i,• )

i=1

≥

···
q
X

≥

so
so
ŵ(B̄(1)soi,• , B̄(2)i,• , . . . , B̄(n)i,• ).

(32)

i=1

Finally, we use the algorithm described in Section C.2 to convert B̄ so (r) into B̄(r) for all r simultaneously.
Supermodularity and componentwise convexity of ŵ ensure that
q
X

so
so
ŵ(B̄(1)soi,• , B̄(2)i,• , . . . , B̄(n)i,• ) ≥

q
X

i=1

ŵ(B̄(1)i,• , B̄(2)i,• , . . . , B̄(n)i,• ).

i=1

Combining this with (32) and (29) then yields Ew(X1 , . . . , Xn ) ≥ Ew(Y1 , . . . , Yn ) for all supermodular w.

D

Comparing Mixtures of Binomial Distributions

Proposition 10 Let Xr = θ + εr and Yr = v + ur for r = 1, . . . , n, wherei) θ ∼ B(ηθ , p), εr ∼ B(ηε , p), v ∼ B(ηv , p), ur ∼ B(ηu , p) for some probability parameter p ∈ (0, 1) andpositive integers ηθ , ηε , ηv , ηu such that ηθ + ηε = ηv + ηu and ηθ ≥ ηv ;ii) θ, {εr }nr=1 are independent and v, {ur }nr=1 are independent.
Then (X1 , . . . , Xn ) SP M (Y1 , . . . , Yn ).
Step 1 The common marginal distribution of each Xr and each Yr is B(η, p), where η ≡ ηθ +ηε = ηv +ηu .
Suppose first that p is a rational number. This will allow us (in Step 2) to represent the mixture
distributions of X and Y in terms of matrices A and B with the property that each row is equally likely tobe realized.
First, though, we can associate (X1 , . . . , Xn ) with a (ηθ + 1) × (ηθ + ηε + 1) row-stochastic matrix C,
whose ith row corresponds to the realization θ = i of the common shock and represents the distribution of
any of the Xr ’s conditional on θ = i, for r = 1, . . . , n.
Similarly, we can associate (Y1 , . . . , Yn ) with a (ηv + 1) × (ηv + ηu + 1) row-stochastic matrix D, withthe same number of columns as C, but fewer rows than C since ηθ ≥ ηv . Both C and D are stochasticallyordered, since an increase in the realization of θ (resp. v) shifts the distribution of each Xr (resp. Yr ) upwardin the sense of first-order stochastic dominance.
Define C̄ and D̄ as the (upper) cumulative versions of C and D. One may think of each column l in C̄
as the support of a random variable Γl s.t. P (Γl = C̄il ) = P (θ = i) for i = {0, . . . , ηθ }, and similarly eachcolumn l of D̄ is the support of a random variable Ψl s.t. P (Ψl = D̄il ) = P (v = i), for i = {0, . . . , ηv }.

47

The key observation is that for each l, Γl dominates Ψl according to the convex ordering: Equivalently,
one can go from the distribution of Ψl to that of Γl by a sequence of mean-preserving spreads. Thisis easily seen as follows. Take any value in the support of Ψl , say D̄il for some given i. This value isequal to P (Yr ≥ l|v = i) or, equivalently, to P r(ur ≥ l − i). By assumption, ur is the sum of ηu ≥ ηεBernoulli variables with parameter p. So ur ∼ εr + δr where δr is independent of εr and is the sum ofηu − ηε Bernoulli variables with parameter p. Therefore, we can decompose P (Yr ≥ l|v = i) as the convex
Pnu −nεP r(δr = k)P r(vr ≥ l − i − k), where the weights P r(δr = k) sum to 1 and the values
combination k=0
P r(vr ≥ l − i − k) are entries in the lth column of C̄. This creates a mean-preserving spread of Ψl , operatingby splitting its ith value. Doing this for all i’s, we obtain a sequence of mean-preserving spreads which takethe same values as Γl . Moreover, the weight for any of these values is the same as the original probability
that Γl takes it; this can be checked by summing the probabilities of obtaining such a value over all themean-preserving spreads which achieve this value as part of their convex combination.
Step 2. Given that p was assumed to be rational, we can convert the matrices C̄ and D̄ into newrow-stochastic matrices Ā and B̄ of the form studied by Theorem 3, i.e., in which each row has equal
probability, by appropriate replications of rows: Given a greatest common divisor ρ (a rational number) of
all the probabilities involved, each row of C̄ can be replicated into an integer number of rows each associatedwith the same value of the common shock and having probability ρ, and similarly for D̄. Moreover, possiblyusing further replications, we can ensure that the resulting matrices Ā and B̄ have the same the numberof rows: this number can be taken to be the smallest multiple of ρ that is integer. (They have the same
number of columns, since this was true of C̄ and D̄.) Note that these row replications leave Ā and B̄
stochastically ordered. Observe also that the row replications do not alter the fact that the lth column ofĀ still dominates the lth column of B̄ according to the convex ordering. This last observation then implies
that A CCM B. (This follows from the well-known fact that if random variable Z dominates W according
to the convex ordering and if one can represent, for some k, the distributions of Z and W as taking therespective values (allowing repetitions) {Z1 , . . . , Zk } and {W1 , . . . , Wk } with probability 1/k each, then thevector (Z1 , . . . , Zk ) majorizes the vector (W1 , . . . , Wk ).)We have thus established that the matrices A and B, for which Ā and B̄, respectively, are the (upper)
cumulative versions, satisfy the hypotheses of Theorem 3. Hence for p rational, Theorem 3 implies that
(X1 , . . . , Xn ) SP M (Y1 , . . . , Yn ).
Step 3. When p is irrational, a simple limit argument shows the result.

E

Proofs for Section 4

Proof of Theorem 4 The proof closely parallels that of Theorem 3. The following lemma plays a roleanalogous to that of Lemma 3 in the proof of Theorem 3.
Lemma 5 Suppose that n = 2 and that there exists a nonnegative vector ε such that for all k ∈ {2, . . . , m},i) Ā2,k ≥ Ā1,k + εk ; ii) B̄1,k = Ā1,k + εk ; and iii) B̄2,k = Ā2,k − εk . Then (X1 , X2 ) ≺SSP M (Y1 , Y2 ) and(X10 , X20 ) ≺SP M (Y10 , Y20 ).
Proof. Proposition 4 implies that (X1 , X2 ) ≺SSP M (Y1 , Y2 ) if and only if (X10 , X20 ) ≺SP M (Y10 , Y20 ). We will
prove that (X10 , X20 ) ≺SP M (Y10 , Y20 ). Conditions ii) and iii) in the statement of the lemma imply that thecolumn sums of B̄ match those of Ā, from which it follows that the common marginal distribution of X10 and
X20 matches the common marginal distribution of Y10 and Y20 . Epstein and Tanny (1980) have shown that48

for bivariate distributions with identical marginals, supermodular dominance is equivalent to upper-orthantdominance. For any k, l ∈ {2, . . . , m},
2[P (Y10 ≥ k, Y20 ≥ l) − P (X10 ≥ k, X20 ≥ l)]= P (Y1 ≥ k, Y2 ≥ l) + P (Y1 ≥ l, Y2 ≥ k) − P (X1 ≥ k, X2 ≥ l) − P (X1 ≥ l, X2 ≥ k)
= B̄1k B̄2l + B̄2k B̄1l − Ā1k Ā2l − Ā2k Ā1l .
Substituting for B̄1k , B̄1l , B̄2k , and B̄2l using conditions ii) and iii), and then simplifying, yields
2[P (Y10 ≥ k, Y20 ≥ l) − P (X10 ≥ k, X20 ≥ l)] = εk [Ā2l − (Ā1l + εl )] + εl [Ā2k − (Ā1k + εk )].

(33)

Condition i) ensures that both of the terms in square brackets on the right-hand side of (33) are nonnegative.
Hence the distribution of (Y10 , Y20 ) dominates that of (X10 , X20 ) according to upper-orthant dominance andtherefore also according to the supermodular ordering.

The transformation in Lemma 5 converting the matrix Ā into B̄ shifts a small amount of weight fromthe stochastically dominant row 2 to the dominated row 1, in (possibly) every column except the first. Thistransformation clearly makes the independent lotteries represented by the rows of the matrix more similar
to one another, while keeping the column sums fixed. The lemma shows that this increasing similarity of
the lotteries translates into symmetric supermodular dominance of the distribution of the lottery outcomes,
or equivalently, into less negative interdependence of the symmetrized distribution of the lottery outcomes.
The proof of Theorem 4 is completed by showing that given any n × m matrices A and B such that
A is stochastically ordered and A CCM B, Ā can be converted into B̄ through a sequence of simple
transformations of the form in Lemma 5, affecting only two of the n rows. As in the proof of Theorem 3, we
proceed in two steps, first proving the claim for the case where B is stochastically ordered (Step 1) and thenextending the argument to the case where B is not stochastically ordered (Step 2). The following lemma,
combined with Lemma 5, then ensures that each simple transformation in the sequence raises the expectedvalue of any symmetric and supermodular objective function.
Lemma 6 Suppose that X and Y are 2-dimensional random vectors such that X ≺SSP M Y and that Z isa p-dimensional random vector independent of X and Y . Then for any p, the (p + 2)-dimensional random
vectors (X, Z) and (Y, Z) satisfy (X, Z) ≺SSP M (Y, Z).
Proof. We need to check that Ew(X, Z) ≤ Ew(Y, Z) for all w symmetric and supermodular. For each z in
Rp , let r(z) = Ew(X, z) and s(z) = Ew(Y, z). For each z, the function w(·, z) is symmetric and supermodular
in its two arguments. Therefore, X ≺SSP M Y implies that r(z) ≤ s(z) for all z. Since also Z is independentof X and Y , it follows that E[w(X, Z)] = E[E[w(X, Z)|Z]] = E[r(Z)] ≤ E[s(Z)] = E[E[w(Y, Z)|Z]] =E[w(Y, Z)].

Step 1: Proof that the distribution corresponding to Ā is SSPM-dominated by that corresponding to B̄ so . We use the proof of Section C.1. The condition that the distribution corresponding to
Ā SPM-dominates that corresponding to E is replaced by the condition that the distribution corresponding
to Ā is SSPM-dominated by that corresponding to E. The proof that the distribution generated by theconstructed matrix D SSPM-dominates that generated by C is based on Lemma 5, instead of Lemma 3.
Because each row now represents the distribution of a different random variable, and random variables are
independently distributed, Lemma 6 guarantees that the result of Lemma 5 pertaining to changes to the
distributions of variables i and i + 1 extends to the multivariate distributions over all n random variables.

49

Step 2: Proof that the distribution corresponding to B̄ so is SSPM-dominated by that corresponding to B̄. We use the proof of Section C.2, again replacing Lemma 3 by Lemma 5. Because each steppreserves row monotonicity, as shown in Section C.2, all rows correspond to actual probability distributions.
This ensures that once again, Lemma 6 can be applied at every step to extend the result of Lemma 5 to themultivariate distributions over all n variables.
Proposition 11 For any row-stochastic matrix A (B), let X (Y ) denote a random vector whose components
are independently distributed and generated by the rows of A (B). Given any m-dimensional probability vectorp, and any n, i) there exists a unique n × m row-stochastic matrix A whose j th column, for each j, sums to
npj , such that for all n×m row-stochastic matrices B with the same column sums as A, (X1 , . . . , Xn ) ≺SSP M(Y1 , . . . , Yn );ii) for the n × m matrix B with all rows equal to the probability vector p and for any stochastically orderedrow-stochastic matrix A whose j th column sums to npj , (X1 , . . . , Xn ) ≺SSP M (Y1 , . . . , Yn ).
The “optimal” matrix B identified by part ii) of Proposition 11 is the one in which all of the lotteries are
identical. In the production context described above, for example, this corresponds to allocating resources
symmetrically across tasks. The “worst” matrix A identified by part i) is the one in which the stochasticallyordered lotteries described by the rows are as disparate as possible, subject to their average equaling thevector p. The lottery represented by row i assigns positive probability either to a single outcome (i.e., it
is degenerate) or to a set of outcomes with adjacent (column) indices, and there is at most one outcome
to which the lotteries in rows i and i + 1 both assign positive probability.54 In the production context
described above, this matrix allocates resources to the various tasks as differently as is feasible, given theoverall resource constraints.55
Proof of Proposition 11
Proof of i): Assume that pj > 0 for all j ∈ {1, . . . , m}. (If for some j, pj = 0, then all entries in thej th column of A would necessarily equal 0.) Given the one-to-one mapping between row-stochastic matrices
and their cumulative-column equivalents, it is sufficient to prove the existence of a unique cumulative-sum
matrix Ā satisfying the claim.
Let bxc denote the largest integer below x, and for a vector v, let v 0 denote its transpose. Given a
Pmprobability vector (p1 , . . . , pm ), define p̄k = j=k pj . Note that p̄1 = 1 and p̄k is strictly decreasing in k.
Consider the cumulative-column matrix Ā whose first column consists of all 1’s and whose k th column has
the form (0, . . . , 0, λk , 1, . . . , 1)0 , where λk ≡ np̄k − bnp̄k c ∈ [0, 1) and where the index of the row in which
λk appears is ik ≡ n − bnp̄k c. Note that since bnp̄k c is weakly decreasing in k, ik is weakly increasing in k.
54

Puccetti and Rüschendorf (2015) are also interested in the best and worst distributions with respect to thesymmetric supermodular ordering, but impose a different set of restrictions than we do.
55
Note that in part i) of the proposition, A yields a distribution that is dominated according to SSP M by thatfrom any other matrix with matching column sums, while in part ii), B yields a distribution that is guaranteed
to dominate only those from stochastically ordered matrices with matching column sums. Let p = ( 14 , 12 , 41 ), let
B equal the 2 × 3 matrix both of whose rows match p, and let A be the 2 × 3 matrix whose first row is ( 21 , 0, 12 )and whose second row is (0, 1, 0). A and B have matching column sums, but A is not stochastically ordered. The
bivariate distributions generated from A and B cannot be ranked according to SSP M : For w(z1 , z2 ) = I{z1 ≥3,z2 ≥2} +1
I{z1 ≥2,z2 ≥3} , Ew(X1 , X2 ) = 21 > 41 = Ew(Y1 , Y2 ), while for w(z1 , z2 ) = I{z1 ≥3,z2 ≥3} , Ew(X1 , X2 ) = 0 < 16=
Ew(Y1 , Y2 ).

50

By construction, the k th column of Ā sums to λk + 1(bnp̄k c) = np̄k , as required. By construction also,
all entries of Ā are in [0, 1]. To confirm that Ā is a valid cumulative-column matrix, we need to confirm thatfor each row, the entries are weakly decreasing in the column index k. If ik < ik+1 , then this is clearly true,since for i < ik , the entries in columns k and k + 1 are both 0, for i = ik , the entry in column k is λk while
the entry in column k is 0, for i = ik+1 , the entry in column k is 1 while that in column k + 1 is λk , and fori > ik+1 , the entries in column k and k + 1 are both 0. If, instead, ik = ik+1 , then we need to check thatλk ≥ λk+1 . Now given the definition of ik , ik = ik+1 implies that bnp̄k c = bnp̄k+1 c, and since p̄k > p̄k+1 , itthen follows from the definition of λk that λk > λk+1 .
By construction, for each column k of Ā, the entries are weakly increasing in the row index, so Ā is
stochastically ordered. Since for each k ≥ 2, all but at most one element of column k equals 0 or 1, it is clearthat for each k, the k th column of Ā majorizes all vectors whose components lie in [0, 1] and sum to np̄k .
Furthermore, among all such vectors, the k th column of Ā is the unique vector with increasing components
which majorizes all others. Therefore, for any other cumulative-column matrix B̄ whose k th column sums
to np̄k , A CCM B, and Ā is the unique matrix for which this statement is true. The claim in part i) thenfollows from Theorem 4.
Proof of ii): Since each row of the matrix B described in part ii) is identical, every column of B̄ consistsof a vector with equal components. Thus, the k th column of B̄ is majorized by any vector whose components
lie in [0, 1] and sum to np̄k , so for any other cumulative-column matrix Ā whose k th column sums to np̄k ,we have A CCM B. With A stochastically ordered, the claim in part ii) then follows from Theorem 4. F

Proofs for Sections 5 and 6

Proof of Proposition 6 Given an arbitrary tournament, let it be summarized by a bistochastic matrix
B, whose ith row describes individual i’s marginal distribution over the n prizes. For any symmetric ex
post welfare function, the realized ex post welfare under the tournament is independent of the allocation ofprizes, since by assumption, each prize must be allocated to exactly one individual. Therefore, the expected
ex post welfare generated by any tournament is the same as that generated by the (degenerate) tournamentsummarized by the n × n identity matrix I—in this tournament, individual i receives the prize of rank iwith probability 1. Moreover, this degenerate tournament coincides with the degenerate independent joint
distribution where individual i receives the prize of rank i with probability 1. For proving the proposition,
it is therefore sufficient to show that the independent joint distribution with marginals represented by therows of I is dominated according to the symmetric supermodular ordering by the independent joint distribution summarized by any bistochastic matrix B. Now the identity matrix I is stochastically ordered andclearly dominates any other bistochastic matrix according to the cumulative column majorization criterion.
Theorem 4 therefore yields the result.

P6
P6
Proof of Proposition 8 Define Nc = i=1 I{Y1 =1} and Nu = i=1 I{X1 =1} : these are the total number of solvent banks in the clustered and unclustered networks, respectively. Proposition 5 implies that
(Y1 , . . . , Y6 ) SSP M (X1 , . . . , X6 ) if and only if the distribution of Nc dominates that of Nu according to theunivariate convex ordering, which we will write as Nc CX Nu . Nc CX Nu if and only if the distributionof Nc is derivable from that of Nu by a sequence of mean-preserving spreads.
Suppose first that the common default threshold for banks, d, satisfies d ∈ [L, 2L+H), so a bank defaults
3
if and only if all three projects in its portfolio fail. We will show that for each k ∈ {0, . . . , 6}, conditional on
k of the 6 projects succeeding, we have Nc CX Nu . Since these conditional distributions are independent51

of p, the probability that any given project succeeds, it will then follow that for all p, Nc CX Nu holds
unconditionally. For each k ∈ {0, 1, 4, 5, 6}, the conditional distributions of Nc and Nu are degenerate andequal. Conditional on k = 3, i) Nc = 3 if all three banks whose projects fail are in the same cluster1(probability 10) and Nc = 6 otherwise; and ii) Nu = 5 if the three banks whose projects fail are adjacent3) and Nu = 6 otherwise. Hence, conditional on k = 3, theto one another in the circle (probability 10
distribution of Nc is a mean-preserving spread of that of Nu . Conditional on k = 2, i) Nc = 3 if three of thefour banks whose projects fail are in the same cluster (probability 52 ) and Nc = 6 otherwise; and ii) Nu takes
the values 4, 5, 6 if the two banks whose projects succeed are adjacent, separated by one bank, and opposite
one another in the circle, respectively; these three events occur with respective probabilities 25 , 25 , 15 . Thus,
conditional on k = 2, the distribution of Nc is a mean-preserving spread of that of Nu . It follows that, ford ∈ [L, 2L+H
) and any p, Nc CX Nu holds unconditionally.
3
Now suppose d ∈ [ L+2H
, H), so a bank is solvent if and only if all three projects in its portfolio succeed.
3), with “solvent” replacing “defaulting” andThis case is the mirror image of the case where d ∈ [L, 2L+H
3
6 − Nc and 6 − Nu replacing Nc and Nu , respectively. Hence, the arguments above immediately imply thatfor all p, 6 − Nc CX 6 − Nu , which is equivalent to Nc CX Nu .
Finally, suppose d ∈ [ 2L+H
, L+2H), so a bank defaults if two or three of the projects in its portfolio
33
fail. For each k ∈ {0, 1, 3, 5, 6}, the conditional distributions of Nc and Nu are degenerate and equal.
Conditional on k = 4, the distributions of Nc and Nu for the current default threshold match, respectively,
the distributions of Nc and Nu , conditional on k = 2, for d = L. Finally, for the current default threshold(under which project successes and failures are mirror images in terms of their effect on bank default), thedistributions of 6 − Nc and 6 − Nu conditional on k = 2 match, respectively, the distributions of Nc and Nu
conditional on k = 4. Hence, for d ∈ [ 2L+H
, L+2H) and for any p, Nc CX Nu holds unconditionally. This3
3
completes the proof of Proposition 8.
Proof of Theorem 5 For the “only if” part, choose any coarsening L̃ and supermodular function w̃ on
L̃. The function w on L defined by w(x) = w̃(x̃(x)), where x̃(x) is the hyperrectangle containing x, is alsosupermodular. Therefore, E[w|G] ≥ E[w|F ]. Equivalently, E[w̃|G̃] ≥ E[w̃|F̃ ]. Since the inequality holds for
any w̃, we conclude that G̃ SP M F̃ .
For the “if” part, consider, for any N > 1, the coarsening L(N ) of L in which each Li is partitioned
into N intervals of equal length. Given any supermodular function w on L, let wN , FN , GN denote thecoarsened versions of w, F, G on L(N ). We first show that wN is supermodular. For any x̃ ∈ L(N ) anddimensions i, j such that x̃ + ei + ej belongs to L(N ), we must show thatwN (x̃) + wN (x̃ + ẽi + ẽj ) ≥ wN (x̃ + ẽi ) + wN (x̃ + ẽj ).

(34)

Given the equal spacing of the chosen partition, the denominator arising in (14) is the same for all x̃’s.
Therefore, (34) reduces to showing that56
Z(w(x) + w(x + di + dj ) − w(x + di ) − w(x + dj ))dx ≥ 0,x∈x̃where di = |Li |/N is the length of each hyperrectangle along dimension i (and similarly for dj ). The
inequality holds by supermodularity of w, which proves that wN is supermodular. As a result, E[wN |GN ] ≥56

Because the distributions F and G are absolutely continuous, it is not necessary to specify in which elements ofthe partition the boundaries of these elements are located.

52

E[wN |FN ] for all N . It remains to show that E[wN |FN ] converges to E[w|F ] as N → ∞. We have
X Z
E[wN |FN ] − E[w|F ] =(wN (x̃) − w(x))f (x)dx.
x̃∈LN

By construction,Rx∈x̃

w(x)dx =

R
x∈x̃

x∈x̃

wN (x̃)dx. Therefore, letting χ(x̃) denote any element of x̃,ZZ(wN (x̃) − w(x))f (x) =x∈x̃

|(wN (x̃) − w(x))(f (x) − f (χ(x̃)))|dx.

(35)

x∈x̃

Fix ε > 0. The density f of F is continuous, and hence uniformly continuous on the compact domain L.
Therefore, there exists N̄ such that for all N > N̄ , |f (x) − f (y)| < ε for all x, y of L belonging to the same
hypercube of L(N ). This, combined with (35), implies thatZ
Z(|wN (x̃)| + |w(x)|)dx.
(wN (x̃) − w(x))f (x) < ε
x∈x̃

x∈x̃

Integrating over L(N ), we get|E[wN |FN ] − E[w|F ]| < ε(kwk1 + kwN k1 ).
It remains to show that kwN k1 is bounded above, uniformly in N . This is implied byX
X Z
kwN k1 =|wN (x̃)| ≤|w(x)|dx = kwk1 < ∞.
x̃∈L(N )x̃∈L(N )x∈x̃
Proof of Proposition 9 Theorem 1 implies that, for two distributions F and G to be comparable according
to the supermodular ordering, they must have identical marginals: Fi = Gi for all i. This in turn implies
that the domain L̃ is the same for both copulas CF and CG . As is easily shown, L̃ = ×i L̃i , where L̃i ={Fi (xi ) : xi ∈ Li }, so L̃ is a lattice. By definition, the Fi ’s are nondecreasing. Moreover, without loss ofgenerality, we can assume that for each i, each level xi is achieved with positive probability (otherwise, we
can simply remove that level from the support Li ), hence the Fi ’s are strictly increasing from Li to L̃i . Now
define X̃i ≡ Fi (Xi ) and Ỹi ≡ Gi (Yi )(= Fi (Yi )). As observed in section 2, this implies that X ≺SP M Y if
and only if X̃ ≺SP M Ỹ . Finally, observe from the definition of a copula in (15) that the joint distributionsof X̃ and Ỹ on L̃ coincide, respectively, with the copulas CF and CG . This proves the result.
G

Double Description Method

G.1

ExampleWe describe the application of the double description method to characterize the supermodular ordering for
L = {0, 1}4 . Since the lattice is four-dimensional, we represent it as the vertices of two cubes, as in Figures
1 and 2. In each figure, the left-hand (respectively, right-hand) cube represents the first three dimensions
when the fourth dimension takes the value 0 (respectively, 1). Comparing distributions g and f , we denotethe values of g(z) − f (z) for z ∈ L = {0, 1}4 with the labels on the vertices in Figure 1. The table below
lists the output of the double description method for this example. The numerical labels for the 16 vertices
themselves, one corresponding to each column of the output, are given in Figure 2. As shown in the table,

53each row of the output specifies one inequality of the form E[w|g] − E[w|f ] ≥ 0, for w one of the extreme raysof the cone of supermodular functions on L = {0, 1}4 . For example, the second row has two 1’s, corresponding
to vertices 1 and 3 (the points (1,1,1,1) and (1,0,1,1), respectively), with all the other entries 0; this row
corresponds to the supermodular function I{z1 =1,z3 =1,z4 =1} , for which the inequality E[w|g] − E[w|f ] ≥ 0
becomes a + b2 ≥ 0. g SP M f if and only if the difference g − f satisfies all of the inequalities in the table.

b1
c12
c14
d3

b4

b2

c13

c24
d2

a

d4

b3
c23

c34
d1

e

Figure 1: Values of g – f on L = {0,1}4

2
4
10
12

9

16

3
6

11

14

1

8
13

15
Figure 2: Labels for the nodes of L = {0,1}4

54

5

7

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Inequalities

1 1 1 1 0 0 0 0 0

0

0

0

0

0

0

0

a+b1+b2+c12≥01 0 1 0 0 0 0 0 0

0

0

0

0

0

0

0

a+b2≥02 1 1 0 1 0 0 0 1

0

0

0

1

0

0

0

2a+Σbi+c34≥0

2 1 1 0 0 0 0 0 1

0

0

0

0

0

0

0

2a+b1+b2+b4≥0

4 2 2 1 2 1 1 0 2

1

0

0

1

0

0

0

4a+2Σbi+c12+c13+c14+c23+c34≥0

1 1 0 0 0 0 0 0 0

0

0

0

0

0

0

0

a+b1≥04 2 2 1 2 1 1 0 2
1 0 0 0 0 0 0 0 0
4 2 2 0 2 1 1 0 2

0
0
1

1
0
1

0
0
0

1
0
1

0
0
0

0
0
0

0
0
0

a≥0

4 2 2 1 2 0 1 0 2

1

1

0

1

0

0

0

4a+2Σbi+c12+c14+c23+c24+c34≥0

4 2 2 1 2 1 0 0 2

1

1

0

1

0

0

0

4a+2Σbi+c12+c13+c14+c24+c34≥0

2 1 1 0 1 0 0 0 0

0

0

0

0

0

0

0

2a+b1+b2+b3≥0

4 2 2 1 2 1 1 0 2

1

1

0

0

0

0

0

4a+2Σbi+c12+c13+c14+c23+c24≥0

2 1 0 0 1 0 0 0 1

0

0

0

0

0

0

0

2a+b1+b3+b4≥0

3 2 2 1 2 1 1 0 1

0

0

0

0

0

0

0

3a+2b1+2b2+2b3+b4+c12+c13+c23≥0

3 2 2 1 1 0 0 0 2

1

1

0

0

0

0

0

3a+2b1+2b2+b3+2b4+c12+c14+c24≥0

2 0 1 0 1 0 0 0 1

0

0

0

0

0

0

0

2a+b2+b3+b4≥0

2 1 1 1 1 0 0 0 1

0

0

0

0

0

0

0

2a+Σbi+c12≥0

1 1 0 0 1 1 0 0 0

0

0

0

0

0

0

0

a+b1+b3+c13≥0

1 0 0 0 1 0 0 0 0

0

0

0

0

0

0

0

a+b3≥02 1 1 0 1 0 0 0 1

0

1

0

0

0

0

0

2a+Σbi+c24≥0

2 1 1 0 1 0 1 0 1

0

0

0

0

0

0

0

2a+Σbi+c23≥0

3 2 1 0 2 1 0 0 2

1

0

0

1

0

0

0

3a+2b1+b2+2b3+2b4+c13+c14+c34≥0

2 1 1 0 1 1 0 0 1

0

0

0

0

0

0

0

2a+Σbi+c13≥0

1 1 0 0 0 0 0 0 1

1

0

0

0

0

0

0

a+b1+b4+c14≥0

1 0 0 0 0 0 0 0 1

0

0

0

0

0

0

0

a+b4≥02 1 1 0 1 0 0 0 1

1

0

0

0

0

0

0

2a+Σbi+c14≥0

3 1 2 0 2 0 1 0 2

0

1

0

1

0

0

0

3a+b1+2b2+2b3+2b4+c23+c24+c34≥0

2 1 1 0 1 0 0 0 1

0

0

0

0

0

0

0

2a+Σbi≥01 0 1 0 1 0 1 0 0

0

0

0

0

0

0

0

a+b2+b3+c23≥0

1 0 1 0 0 0 0 0 1

0

1

0

0

0

0

0

a+b2+b4+c24≥0

1 0 0 0 1 0 0 0 1

0

0

0

1

0

0

0

a+b3+b4+c34≥02 1 2 1 1 0 1 0 1

0

1

0

0

0

0

0

2a+Σbi+b2+c12+c23+c24≥0

2 2 1 1 1 1 0 0 1

1

0

0

0

0

0

0

2a+Σbi+b1+c12+c13+c14≥0

2 1 1 0 2 1 1 0 1

0

0

0

1

0

0

0

2a+Σbi+b3+c13+c23+c34≥0

2 1 1 0 1 0 0 0 2

1

1

0

1

0

0

0

2a+Σbi+b4+c14+c24+c34≥0

3 2 2 1 2 1 1 0 2

1

1

0

1

0

0

0

3a+2Σbi+Σcij≥0

1 1 1 1 1 1 1 1 0

0

0

0

0

0

0

0

a+b1+b2+b3+c12+c13+c23+d4≥0

1 1 1 1 0 0 0 0 1

1

1

1

0

0

0

0

a+b1+b2+b4+c12+c14+c24+d3≥0

1 1 0 0 1 1 0 0 1

1

0

0

1

1

0

0

a+b1+b3+b4+c13+c14+c34+d2≥0

1 0 1 0 1 0 1 0 1

0

1

0

1

0

1

0

a+b2+b3+b4+c23+c24+c34+d1≥0

0 -1

0

0

1

-3a+2Σbi+Σcij+e≥0-3 -2 -2 -1 -2 -1 -1 0 -2 -1 -1

4a+2Σbi+c12+c13+c23+c24+c34≥0
4a+2Σbi+c13+c14+c23+c24+c34≥0

55

G.2

Complexity

Avis and Bremner (1995) show that the double description algorithm described by Motzkin et al. (1953)
has complexity O(pbd/2c ) where d is the dimension of the space and p is the number of inequalities definedby the representation matrix. Given a finite lattice L = ×ni=1 Li of Rn with |Li | = mi , the dimension ofQn
the vector space generated by associating a dimension to each node of L is d = i=1 mi . To compute thenumber p of inequalities, first recall Proposition 2, which states that all of the elementary transformationst ∈ T are extreme, so it is impossible to reduce the number of inequalities required to check supermodularity by removing redundant elementary transformations. Therefore, p equals the number of elementarytransformations on L, which it is straightforward to calculate:Xp=(mi − 1)(mj − 1)Πk∈{i,j}mk .
/1≤i<j≤n

Suppose, for example, that mi is exactly m for each of the n dimensions. Thenp=n(n − 1)n(n − 1) n(m − 1)2 mn−2 ∼
m
2
2

and

d = mn .

Therefore, the double description method has complexity O(exp(mn (n log m + 2 log n))). In practice, therefore, the inequalities characterizing the supermodular ordering can be computed via this method only for“small-size” problems. However, the “size” of a problem can be reduced by aggregating data into coarser
categories, and as discussed in Section 2, aggregation of data preserves the supermodular ordering. Thus,
with an appropriate degree of coarsening of categories, the double description method can be used to achievea tractable comparison of distributions according to the supermodular ordering.

G.3

Code for Double Description Method

Below we provide the Matlab code implementing the double description method for both the supermodular
ordering and the symmetric supermodular ordering.

56

CODE FOR COMPUTING THE LIST OF INEQUALITIES THAT CHARACTERIZE THE SUPERMODULAR STOCHASTIC ORDERING.
%%% THIS CODE IS BASED ON THE DUAL CONE REPRESENTATION ALGORITHM BY FUKUDA,%%% AND REQUIRES THE MATLAB FILE cddmex.dll%%% PART I: The function falgo(d) takes as an imput the vector of dimensions of the lattice%%% for which the SSO is characterized.
%%% The output is the list of inequalities that the difference vector g-f mut satisfy,%%% in order to be comparable in the SSO sense
function func = falgo(d)k = numel(d);w = ones(1,k);for j=2:kw(j) = prod(d(1:j-1));end
m = prod(d);A = zeros(1,m);i = ones(1,k);while sum(i) < sum(d)l1 = (i-1)*w'+1;
for j1 = 1:kfor j2 = j1+1:kif (d(j1)-i(j1))*(d(j2)-i(j2))>0
v = zeros(1,m);v(l1) = 1;v(l1 + w(j1)) = -1;v(l1 + w(j2)) = -1;v(l1 + w(j1) + w(j2)) = 1;
A = [A; v];
end
end
end
l = find(d-i>0,1);i(1:l-1) = 1;i(l) = i(l)+1;
end
A = A(2:end,:);size(A);
H=struct('A',-A,'B',zeros(size(A,1),1));
func =cddmex('extreme',H);%%% PART II: The function fdimsym characterizes the symmetric supermodular stochastic%%% ordering.
%%% It takes as inputs the number of dimensions of the lattice, and the (common) number of points%%% in the support along each dimension.
function func = fdimsym(ndimensions,npoints)
k = ndimensions;d = npoints*ones(1,k);w = ones(1,k);for j=2:kw(j) = prod(d(1:j-1)); % w indicates index shift per dimensionend
m = prod(d);A = zeros(1,m);i = ones(1,k);nsym = nchoosek(ndimensions+npoints-1,npoints-1);
T = zeros(m,nsym);
countsym = zeros(1,nsym);
while sum(i) <= sum(d)l1 = (i-1)*w'+1;% returns index representation from spatial representation57

ri = rearrange(i,npoints);
lexi = lexico(ri);T(l1,lexi) = 1;
countsym(lexi) = countsym(lexi)+1;
for j1 = 1:kfor j2 = j1+1:kif (d(j1)-i(j1))*(d(j2)-i(j2))>0
v = zeros(1,m);v(l1) = 1;v(l1 + w(j1)) = -1;v(l1 + w(j2)) = -1;v(l1 + w(j1) + w(j2)) = 1;
A = [A; v];
end
end
end
if i==di(1) = i(1) + 1;
end
l = find(d-i>0,1);i(1:l-1) = 1;i(l) = i(l)+1;
end
A = A(2:end,:);%size(A);SA = A*T;
j = 1;
while j<size(SA,1);
v = SA(j,:);elim = j+1;
while elim <= size(SA,1)
if SA(elim,:)==v
if elim == size(SA,1);
SA = SA(1:elim-1,:);else
SA = SA([1:elim-1 elim+1:end],:);
end
else
elim = elim + 1;
end
end
j = j+1;
endSA;
H=struct('A',-SA,'B',zeros(size(SA,1),1));
Ray =cddmex('extreme',H);func = \{Ray.R*diag(countsym) ; Ray.lin\};58